Good evening Ladies and Gentlemen:
Here are the following closes for gold and silver today:
Gold: $1188.30 down $1.10 (comex closing time)
Silver $16.76 down 2 cents (comex closing time)
In the access market 5:15 pm
Gold $1189.50
Silver: $16.76
Gold/Silver trading: see kitco charts on the right side of the commentary
Early this morning gold and silver spiked northbound on no news.
Dave Kranzler explains;
Gold/Silver Spike Up On No News
I wasn’t paying attention to the precious metals for a few mintues. I get an email from Bill “Midas” Murphy that just said “what the heck?” I knew right away to look at the metals market trading. Gold and silver both spiked up suddenly just after 9 a.m. EST:
My response: I don’t see any new Bill. The dollar has been dropping hard all morning.
Honestly, a spike like this on no news is ALWAYS welcome. I’m wondering if a few more longs decided to hang on for delivery than was expected. I know the open interest was much higher on Friday than I had expected.
The dollar has been dropping hard all morning. Certainly it can’t be on any possible Greece news or rumors given that the SPX appears to be resuming it’s parabolic bubble move higher while the U.S. economy is turning south – quickly.
Perhaps what’s most interesting to me about the behavior of gold and silver as we moved through options expiry last week and into first notice is that the Comex bullion bank criminal-admitted-felons gold cartel was unable to smash gold despite unusually high open interest on first notice. While I predicted that the o/i would tumble below 10k contracts by Friday, it was still a healthy 8k+ open contracts, which is more than 2 times the amount of available gold in the “registered,” available for delivery accounts in the criminal bank vaults.
The metals are definitely behaving differently right now, and I’m not the only analyst who has noticed this.
end
Then after spending a couple of hours above 1200 dollars, both gold and silver were whacked. It sure looks like 1200 dollar gold and 17.00 dollar silver are toxic to our bankers due to the mammoth derivatives underwritten on our two precious metals.
Following is a brief outline on gold and silver comex figures for today:
At the gold comex today, we had a poor delivery day, registering only 3 notices serviced for 300 oz on first day notice. Silver comex filed with 2 notices for 10,000 oz which is quite high for a non active delivery month.
Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 244.83 tonnes for a loss of 58 tonnes over that period.
In silver, the open interest fell by 518 contracts as Friday’s silver price was up by 3 cents. The total silver OI continues to remain extremely high with today’s reading at 177,504 contracts maintaining itself near multi-year highs despite a record low price. This dichotomy has been happening now for quite a while and defies logic. There is no doubt that the silver situation is scaring our bankers to no end.
In silver we had 2 notices served upon for 10,000 oz.
In gold, the total comex gold OI rests tonight at 397,719 for a loss of 835 contracts as gold was up $1.30 on Friday. We had 3 notices served upon for 300 oz. Whenever we approach first day notice, the entire open interest for the gold or silver complex collapses as does the amount of gold/silver OI standing in the front active delivery month.
Today, we had a huge withdrawal in inventory of 1.79 tonnes at the GLD, thus the inventory rests tonight at 714.07 tonnes. The appetite for gold coming from China is depleting not only gold from the LBMA and GLD but also the comex is bleeding gold.
In silver, /we had no change in silver inventory at the SLV/Inventory rests at 317.070 million oz
We have a few important stories to bring to your attention today…
1. Today, is second day notice for both silver and gold. We had the open interest in silver fall by 518 contracts despite the fact that silver was up in price by 3 cents day. The OI for gold fell by 835 contracts down to 397,719 contracts as the price of gold was up by $1.30 on Friday. We again witness the collapse in the front month OI for no apparent reason.
(report Harvey)
2,Today we had 8 major commentaries on Greece. The must read commentaries are from Alasdair Macleod, Herman Sinn/ Bloomberg and the last commentary from zero hedge)
(zero hedge/Herman Sinn/Alasdair Macleod/Bloomberg )
3. Bill Holter’s topic today “Those crazy gold bugs!!”
(Bill Holter/Holter/Sinclair collaboration)
4 Two commentaries on Russia
(zero hedge)
5.We have another charge on two individuals from India on gold spoofing at the comex
courtesy of our ever so vigilant boys, the CME.
(CME/zero hedge)
6. French unemployment continues to head northbound as its economy falters
(Bloomberg)
7. Argentina’s debt continues to rise as this country approaches conditions similar to 2002
(Bloomberg)
8. USA manufacturing PMI falters again even though iSM manufacturing rises on seasonal adjustments
(zero hedge)
9.USA consumer spending falls again
(Reuters)
we have these plus other stories to bring your way tonight. But first……..
let us now head over to the comex and assess trading over there today.
Here are today’s comex results:
The total gold comex open interest fell by 835 contracts from 398,554 down to 397,719 as gold was up by $1.30 on Friday (at the comex close). For at least the past 18 months, we have been witnessing a total contraction of open interest in an active precious metals month once we are about to enter first day notice as well as the dumping of front month open interest, once we surpass first day notice, and today the tradition continues. We are now in the big active delivery contract month of June. Here the OI fell by 2845 contracts down to 5,535. We had only 43 notices served upon on Friday. Thus we lost 2,802 contracts or an additional 280,200 oz will not stand for delivery. No doubt we had a huge number of cash settlements. The next contract month is July and here the OI rose by 60 contracts up to 479. The next big delivery month after June will be August and here the OI rose by 572 contracts to 257,964. The estimated volume today (which is just comex sales during regular business hours of 8:20 until 1:30 pm est) was poor at 63,040. The confirmed volume yesterday (which includes the volume during regular business hours + access market sales the previous day) was poor at 113,599 contracts. Today we had only 43 notices filed for 4,300 oz.
And now for the wild silver comex results. Silver OI fell by 518 contracts from 178,022 down to 177,504 as the price of silver was up in price by 3 cents, with respect to Friday’s trading. We have now closed the active contract month of May. The front non active delivery month of June saw it’s OI fall by 195 contracts down to 32. We had 197 contracts delivered upon on Friday. Thus we gained 2 contracts or an additional 10,000 oz will stand for delivery in this non active June contract month. The estimated volume today was poor at 14,998 contracts (just comex sales during regular business hours. The confirmed volume on Friday (regular plus access market) came in at 36,241 contracts which is very good in volume. We had 3 notices filed for 3,000 oz today.
June initial standing
June 1.2015
Gold |
Ounces |
Withdrawals from Dealers Inventory in oz | nil |
Withdrawals from Customer Inventory in oz | 98.621 oz (Delaware) |
Deposits to the Dealer Inventory in oz | nil |
Deposits to the Customer Inventory, in oz | nil |
No of oz served (contracts) today | 46 contracts (4600 oz) |
No of oz to be served (notices) | 5532 contracts (553,200 oz) |
Total monthly oz gold served (contracts) so far this month | 46 contracts(4600 oz) |
Total accumulative withdrawals of gold from the Dealers inventory this month | nil |
Total accumulative withdrawal of gold from the Customer inventory this month | 1384.60 oz |
Today, we had 0 dealer transactions
total Dealer withdrawals: nil oz
we had 0 dealer deposit
total dealer deposit: nil oz
we had 1 customer withdrawals
i) Out of Delaware 98.621 oz
total customer withdrawal: 98.621 oz
Strange!! as we enter second day notice, no deposits of gold!!
We had 0 customer deposits:
Total customer deposit: nil oz
We had 0 adjustment:
Today, 0 notices was issued from JPMorgan dealer account and 32 notices were issued from their client or customer account. The total of all issuance by all participants equates to 3 contracts of which 0 notices were stopped (received) by JPMorgan dealer and 0 notices were stopped (received) by JPMorgan customer account
To calculate the total number of gold ounces standing for the May contract month, we take the total number of notices filed so far for the month (46) x 100 oz or 4600 oz , to which we add the difference between the open interest for the front month of June (5535) and the number of notice served upon today (3) x 100 oz equals the number of ounces standing.
Thus the initial standings for gold for the June contract month:
No of notices served so far (46) x 100 oz or ounces + {OI for the front month (5535) – the number of notices served upon today (3) x 100 oz which equals 557,800 oz standing so far in this month of June (17.349 tonnes of gold). Thus we have 17.349 tonnes of gold standing and only 11.52 tonnes of registered or for sale gold is available:
Total dealer inventory: 370,451.835 or 11.522 tonnes
Total gold inventory (dealer and customer) = 7,871,422.294 (244.83) tonnes)
Several months ago the comex had 303 tonnes of total gold. Today the total inventory rests at 244.83 tonnes for a loss of 58 tonnes over that period.
end
And now for silver
June silver initial standings
June 1 2015:
Silver |
Ounces |
Withdrawals from Dealers Inventory | nil |
Withdrawals from Customer Inventory | 3,056.75 oz (HSBC) |
Deposits to the Dealer Inventory | nil |
Deposits to the Customer Inventory | 629,943.422 oz (Brinks,CNT) |
No of oz served (contracts) | 2 contracts (10,000 oz) |
No of oz to be served (notices) | 30 contracts(150,000 oz) |
Total monthly oz silver served (contracts) | 199 contracts (995,000 oz) |
Total accumulative withdrawal of silver from the Dealers inventory this month | nil |
Total accumulative withdrawal of silver from the Customer inventory this month | 33,242.800 oz |
Today, we had 0 deposits into the dealer account:
total dealer deposit: nil oz
we had 0 dealer withdrawal:
total dealer withdrawal: nil oz
We had 2 customer deposits:
i) Into Brinks; 30,186.000 oz ???
ii) Into CNT 599,757.422 oz
total customer deposit: 629,843.422 oz
We had 1 customer withdrawal:
i) Out of HSBC: 3,056.75 oz
total withdrawals from customer; 3,056.75 oz
we had 2 adjustment
i) Out of Brinks:
we had this adjustment whereby 31,272.09 oz was adjusted out of the dealer of Brinks into the customer account of Brinks
ii) Out of Delaware:
88,587.128 oz was adjusted out of the dealer and this landed into the customer account of Delaware.
Total dealer inventory: 58.304 million oz
Total of all silver inventory (dealer and customer) 179.913 million oz
The total number of notices filed today is represented by 2 contracts for 10,000 oz. To calculate the number of silver ounces that will stand for delivery in June, we take the total number of notices filed for the month so far at (199) x 5,000 oz = 995,000 oz to which we add the difference between the open interest for the front month of June (32) and the number of notices served upon today (2) x 5000 oz equals the number of ounces standing.
Thus the initial standings for silver for the June contract month:
199 (notices served so far) + { OI for front month of June (32) -number of notices served upon today (2} x 5000 oz = 1,145,000 oz of silver standing for the June contract month.
we gained 2 contracts or an additional 10,000 oz will stand for delivery in this month of June.
for those wishing to see the rest of data today see:
http://www.harveyorgan.wordpress.com orhttp://www.harveyorganblog.com
end
The two ETF’s that I follow are the GLD and SLV. You must be very careful in trading these vehicles as these funds do not have any beneficial gold or silver behind them. They probably have only paper claims and when the dust settles, on a collapse, there will be countless class action lawsuits trying to recover your lost investment.
There is now evidence that the GLD and SLV are paper settling on the comex.
***I do not think that the GLD will head to zero as we still have some GLD shareholders who think that gold is the right vehicle to be in even though they do not understand the difference between paper gold and physical gold. I can visualize demand coming to the buyers side:
i) demand from paper gold shareholders
ii) demand from the bankers who then redeem for gold to send this gold onto China
vs no sellers of GLD paper.
And now the Gold inventory at the GLD:
June 1/ we had a huge withdrawal of 1.79 tonnes of gold from the GLD/Inventory rests tonight at 714.07 tonnes
May 29/ no changes in gold inventory at the GLD/Inventory rests at 715.86 tonnes
May 28/ no changes in gold inventory at the GLD/Inventory rests at 715.86 tonnes
may 27: no changes in gold inventory at the GLD/Inventory rests at 715.86 tonnes
may 26.2015/we had a slight addition of .600 tonnes of gold to the GLD inventory/inventory rests at 715.86 tonnes
May 22.2015: no changes in gold inventory at the GLD/Inventory rests at 715.26 tonnes
May 21./no changes in gold inventory at the GLD/Inventory rests at 715.26 tonnes
May 20./we had another withdrawal of 2.98 tonnes of gold leaving the GLD. Inventory rests tonight at 715.26 tonnes
May 19/no changes in gold inventory at the GLD/Inventory at 718.24 tonnes
June 1 GLD : 714.07 tonnes.
end
And now for silver (SLV)
June 1/no change in inventory at the SLV/Inventory rests at 317.07 million oz
May 29/no changes in inventory at the SLV/Inventory rests at 317.07 million oz
May 28/a small deposit of 143,000 oz of silver added to the SLV/Inventory rests at 317.070 million oz
May 27/we had another 1.003 million oz withdrawn from the SLV/Inventory rests tonight at 316.927 million oz
May 26.2015: no change in SLV /Inventory rests at 317.93 million oz
May 22.2015: no changes in SLV/Inventory rests at 317.93 million oz
May 21.no changes at the SLV/Inventory rests at 317.93 million oz
May 20/no changes at the SLV. Inventory rests at 317.93 million oz/
June 1/2015: no change in inventory/SLV inventory at 317.070 million oz/
end
And now for our premiums to NAV for the funds I follow:
Sprott and Central Fund of Canada.
(both of these funds have 100% physical metal behind them and unencumbered and I can vouch for that)
1. Central Fund of Canada: traded at Negative 8.4% percent to NAV in usa funds and Negative 8.5% to NAV for Cdn funds!!!!!!!
Percentage of fund in gold 61.2%
Percentage of fund in silver:38.5%
cash .3%
( June 1/2015)
2. Sprott silver fund (PSLV): Premium to NAV rises to-0.25%!!!!! NAV (June 1/2015)
3. Sprott gold fund (PHYS): premium to NAV rises to -37% to NAV(June 1/2015
Note: Sprott silver trust back into negative territory at -0.25%.
Sprott physical gold trust is back into negative territory at -.37%
Central fund of Canada’s is still in jail.
Last week Sprott formally launches its offer for Central Trust gold and Silver Bullion trust:
SII.CN Sprott formally launches previously announced offers to Central GoldTrust (GTU.UT.CN) and Silver Bullion Trust (SBT.UT.CN) unitholders (C$2.64)
Sprott Asset Management has formally commenced its offers to acquire all of the outstanding units of Central GoldTrust and Silver Bullion Trust, respectively, on a NAV to NAV exchange basis.
Note company announced its intent to make the offer on 23-Apr-15 Based on the NAV per unit of Sprott Physical Gold Trust $9.98 and Central GoldTrust $44.36 on 22-May, a unitholder would receive 4.45 Sprott Physical Gold Trust units for each Central GoldTrust unit tendered in the Offer.
Based on the NAV per unit of Sprott Physical Silver Trust $6.66 and Silver Bullion Trust $10.00 on 22-May, a unitholder would receive 1.50 Sprott Physical Silver Trust units for each Silver Bullion Trust unit tendered in the Offer.
* * * * *
end
Early morning trading from Asia and Europe last night:
Gold and silver trading from Europe overnight/and important physical
stories
(courtesy Mark O’Byrne/Goldcore)
off today
end
(courtesy GATA)
Texas also aims to repatriate its gold … from HSBC in New York
A Gold Rush in Texas?
By Anna M. Tinsley
Fort Worth Star-Telegram
Saturday, May 30, 2015
http://www.star-telegram.com/news/politics-government/article22707600.ht…
AUSTIN, Texas — Texas — long known for cattle, cowboys, and oil — could soon be on the map for something much different.
Gold.
State Rep. Giovanni Capriglione asked the Legislature to create a Texas Bullion Depository, where Texas could store its gold, which is now in New York, and where others could keep their precious metals.
The Southlake Republican must have the golden touch, because the House and the Senate have signed off on his plan and his bill appears headed to Gov. Greg Abbott for consideration.
“We are not talking Fort Knox,” Capriglione said. “But when I first announced this, I got so many emails and phone calls from people literally all over the world who said they want to store their gold … in a Texas depository.
“People have this image of Texas as big and powerful … so for a lot of people, this is exactly where they would want to go with their gold.”
And other precious metals.
House Bill 483 would let the Texas comptroller’s office establish the state’s first bullion depository at a location yet to be determined.
Capriglione’s changes to the bill must be approved by Monday, the last day of the 84th legislative session.
The goal is to create a secure facility that would allow the state to bring home more than $1 billion in gold bars that are owned by the University of Texas Investment Management Co. and are now housed at the Hong Kong and Shanghai Bank in New York.
“The depository would be an agency of the state located in the Office of the Comptroller, directed by an administrator appointed by the Comptroller with the advice and consent of the Governor, Lieutenant Governor and Senate,” according to a fiscal analysis of the bill.
The depository could also hold deposits of gold and other precious metals from financial institutions, cities, school districts, businesses, individuals and countries.
“This will allow for bullion to be deposited here, as well as any other investments that … any state agencies, businesses or individuals have,” Capriglione said.
Storage fees will be charged, perhaps generating revenue for the state. For instance, Texas pays about $1 million a year to store its gold in New York, Capriglione said.
A fiscal note attached to the bill states that the depository will have “an indeterminate fiscal impact” on the state, depending on the number of transactions and fees, but says it’s too early to determine the extent.
“It’s unusual,” said Cal Jillson, a political science professor at Southern Methodist University. “So far as I know, there are no states with bullion depositories.”
Supporters of the bill include the Conservative Republicans of Texas and Texans for Accountable Government. No opposition was registered.
This is Capriglione’s second attempt to create the depository. Two years ago, then-Gov. Rick Perry was on board, saying work was moving forward on “bringing gold that belongs to the state of Texas back into the state.”
“If we own it,” Perry has said, “I will suggest to you that that’s not someone else’s determination whether we can take possession of it back or not.”
In 2013, the Legislature ended before Capriglione could win approval of the bill.
Jillson said the bill’s sentiment is consistent with the anti-federal approach that conservative lawmakers have taken this year.
“It’s in line with the idea that Texas is exceptional and needs to keep a distance from the federal government that respects individual states’ depositories,” he said.
Capriglione said developing rules for the depository could take six months. But it could be a whole new industry for the state, he said.
“What I’m really hoping to do is to create a central storehouse of commodities,” he said. “I’m hoping we can start working on it as soon as the governor signs off on it.”
end
What a complete joke;
(courtesy CME/zero hedge)
The CME Cracks Down On Another Gold Spoofing Mastermind
One month ago, days after explicit Zero Hedge step-by-step guide of precisely how gold manipulation takes place, the CME cracked down on the evil Indian market manipulating mastermind Nasil Salim (and his ostensibly less evil sidekick) Heet Khara, for spoofing and otherwise rigging the gold market for months on end. His punishment: a 60 day denial of access to the CME. A week late, a seven person crack CFTC team finally figured out how to read the charts posted on ZH 10 days earlier, and charged the two with illegal market spoofing.
Well, it is time for another sacrificial gold market manipulation crackdown (the same gold market, mind you, which CFTC commissioner and HFT lobby sellout extraordinaire Bart Chilton said was completely unrigged). Only it’s not Barcalys, JPM, Virtu, Citadel, the NY Fed, the Bank of England, or even the PBOC – i.e., the real market manipulators – who is the receiving end of the CME’s special breed of “justice.” It is another “trade from his parents’ home” Indian.
To wit:
NON-MEMBER: HIMANSHU KALRA
EXCHANGE RULES: Rule 432. General Offenses (in part)
It shall be an offense:
B.2. to engage in conduct or proceedings inconsistent with just and equitable principles of trade;
Q. to commit an act which is detrimental to the interest or welfare of the Exchange or to engage in any conduct which tends to impair the dignity or good name of the Exchange;
T. to engage in dishonorable or uncommercial conduct.
FINDINGS:
Pursuant to an offer of settlement that Himanshu Kalra (“Kalra”) presented at a hearing on May 28, 2015, in which Kalra neither admitted nor denied the factual allegations or rule violations upon which the penalty is based, a Panel of the COMEX Business Conduct Committee (“Panel”) found that Kalra consented to the jurisdiction of the Exchange for the time period of March 1, 2012 through August 19, 2012 and that, for the time period of August 20, 2012 through October 31, 2012, it had jurisdiction over Kalra pursuant to Exchange Rules 400 and 418. The Panel further found that on multiple trade dates during the time period of March 1, 2012 through October 31, 2012, Kalra engaged in a pattern of activity in which he repeatedly entered orders or layered multiple orders for Gold and Silver futures contracts without the intent to trade. Specifically, Kalra entered these orders or layered multiple orders to encourage market participants to trade opposite his smaller orders that were resting on the opposite side of the book. After receiving a fill on his smaller orders, Kalra would then cancel the resting order or layered multiple orders that he had entered on the opposite side of the order book.
The Panel concluded that Kalra violated Exchange Rules 432.B.2., 432.Q., and 432.T.
What is Kalra’s penalty?
In accordance with the settlement offer, the Panel ordered Kalra to pay a fine to the Exchange in the amount of $35,000 and to serve a 30 business day suspension of all membership privileges and direct or indirect access to any CME Group Inc. trading floor or electronic trading or clearing platform owned or operated by CME Group Inc., including CME Globex. The suspension shall run from June 1, 2015 through and including July 13, 2015.
To summarize:
- the only people the CME will throw under a bus for manipulating gold are “trade from their parents basement” Indians
- the penalty for manipulating gold is a 30 day suspension, and a $35,000 fine. Manipulate the S&P500 however, and don’t pass go but go straight to jail for life, sorry Navinder Sarao (whose origin isnot Kentucky).
And with that we sit back and await for the CME to unveil the next Indian gold spoofing and market manipulating mastermind, an appropriately and timely distraction just so Benoit Gilson can continue to do what he does best without too much attention.
end
(courtesy Lawrence Williams/Mineweb)
China gold demand holding up well – new record ahead?
We keep seeing reports in the mainstream media suggesting that Chinese gold demand is slipping away, but continuing strong gold withdrawal figures from the Shanghai Gold Exchange (SGE) seem to contradict these reports. While, as we have reported before, there are many doubts expressed as to whether SGE withdrawals are actually equivalent to Chinese consumer demand, there is no doubt that they do represent the underlying consumption situation.
Hong Kong-based Philip Klapwijk, the former executive chairman of GFMS prior to its acquisition by Thomson Reuters, did explain some of the discrepancies between the mainstream analysts’ Chinese consumption figures and SGE withdrawals (which differed last year by around 1,000 tonnes) as unrecorded cross border gold movement from mainland China into Hong Kong (technically illegal) in a presentation to the Bloomberg Precious Metals Forum a week ago (See – Chinese do export gold – to Hong Kong: Klapwijk), but he also noted that due to a clampdown by authorities this amount had ‘fallen off a cliff’ so far this year, which raises the question as to where all this gold being withdrawn from the SGE is going if it is not being technically ‘consumed’ in the mainland, or being ‘exported’ to Hong Kong.
The latest figure for SGE withdrawals, announced Friday, is for 42 tonnes for the week ended May 22, bringing the total so far this year to 945 tonnes in only 20 weeks. The levels are actually high for the time of year, which is usually a low period for SGE gold movements. Thus average weekly withdrawals so far this year have amounted to over 47 tonnes. While this includes the relatively high demand levels up to the Chinese New Year, it should also be recognised that the final four months of the calendar year also tend to see very high SGE withdrawal numbers.
So it is certainly conceivable, should the current high demand levels continue anywhere near the current volumes through the summer – and so far there’s been no sign that they may be easing – and there is the usual pick-up from September onwards, SGE withdrawals this year could well match, or exceed those of the record 2013 year when the total came to over 2,200 tonnes (representing an average of just over 42 tonnes a week).
With Indian demand imports expected to exceed 1,000 tonnes this year – more if one includes smuggled metal which still appears to be running at a high rate – gold flows into the two Asian giants are continuing unabated. Where the big unknown comes in now is what China intends to do next. We see tensions rising between China and the US over the latter’s increasing involvement in the political manoeuvrings over the South China Sea (which China feels is none of the US’s business) and possible further tensions arising from any US opposition to the further growth of the Chinese yuan’s influence as a globally traded currency, there is a prediction in some quarters that China is planning to wrest control of the global gold benchmark pricing system away from London with a launch of a Shanghai ‘gold fix’ later this year. And if the yuan is accepted as a part of the IMF’s SDR currency basket then it will be all-change in the gold market from the beginning of 2016 with China becoming the dominant influence.
This may well be a prediction too far. But it is fairly safe to say that China, and some of its allies – notably Russia – are moving towards a situation where they would like gold to play a regenerated role in the global monetary system and world trade. This is so counter to most Western economic thought that when a mainstream analyst suggests only that we should think about the possibility that China might be moving towards some kind of gold backing for its currency (not necessarily a gold standard in the old sense with full currency backing by the yellow metal), he is almost universally ridiculed by the economic establishment. (See: Will China go for a gold standard? The jury is out!) – yet ‘thinking outside the box’ and very rapid implementation of new ideas is what the Chinese establishment is particularly good at. You just can’t write off the possibility that the Asian Dragon might come up with some kind of radical currency move that runs counter to accepted western economic thought. It certainly has sufficient Forex reserves to implement some kind of move which might have an adverse effect on the dollar. At the moment there is something of an economic truce between the world’s two superpowers, but the US needs to be careful how it proceeds with protecting the dollar’s global position at the expense of China. If you kick a dragon you’re likely to get burnt!
You will enjoy this offering form Bill Holter…
(courtesy Bill Holter/Holter/Sinclair collaboration)
Those Crazy Gold Bugs!
Rather than write about the economy, the markets or geopolitics, today let’s look at something a little different. It’s important every once in a while to step back and take in the big picture because we are all guilty of getting too close or “finite” if you will. We fight the daily battles while losing sight of what the war is really about. Gold advocates otherwise known as “gold bugs” have been worn down by the daily battles, some have even forgotten what the real war is. Gold bugs, these are the “crazies” out there who are described as nuts or “conspiracy theorists”. We know now they were not “theorists” at all. JP Morgan’s $32 billion paid in fines along with many other fined and censured firms is proof of conspiracy FACT!
And now overnight trading in stocks and currency in Europe and Asia
1 Chinese yuan vs USA dollar/yuan strengthens to 6.1991/Shanghai bourse green and Hang Sang: green
2 Nikkei closed up by 6.72 points or .03%
3. Europe stocks mostly in the red/USA dollar index up to 97.33/Euro falls to 1.0926/
3b Japan 10 year bond yield: slight rises to .41% !!!!(Japan buying 100% of bond issuance)/Japanese yen vs usa cross now at 124.5/
3c Nikkei still just above 20,000
3d USA/Yen rate now well above the 124 barrier this morning
3e WTI 59.46 and Brent: 64.91
3f Gold down/Yen down
3gJapan is to buy the equivalent of 108 billion uSA dollars worth of bond per month or $1.3 trillion. Japan’s GDP equals 5 trillion usa.
Japan to buy 100% of all new Japanese debt and by 2018 they will have 25% of all Japanese debt. Fifty percent of Japanese budget financed with debt. Last night Japan refused to increase it’s QE
3h Oil down for WTI and down for Brent this morning
3i European bond buying continues to push yields lower on all fronts in the EMU. German 10 yr bund falls to 49 basis points. German bunds in negative yields from 5 years out.
Except Greece which sees its 2 year rate rise to 24.53%/Greek stocks down 1.44%/ still expect continual bank runs on Greek banks(see below)./Greek default inevitable/
3j Greek 10 year bond yield rises to: 11.36%
3k Gold at 1184.80 dollars/silver $16.63
3l USA vs Russian rouble; (Russian rouble falls 1 rouble/dollar in value) 53.40 , the rouble is still the best acting currency this year!!
3m oil into the 59 dollar handle for WTI and 64 handle for Brent/Saudi Arabia increases production to drive out competition.
3n Higher foreign deposits out of China sees huge risk of outflows and a currency depreciation. This can spell financial disaster for the rest of the world/China may be forced to do QE!!
30 SNB (Swiss National Bank) still intervening again in the markets driving down the SF. It is not working: USA/SF this morning .9454 as the Swiss Franc is still rising against most currencies. Euro vs SF is 1.0328 well below the floor set by the Swiss Finance Minister.
3p Britain’s serious fraud squad investigating the Bank of England/
3r the 5 year German bund remains in negative territory with the 10 year moving closer to negativity at +.49/
3s Four weeks ago, the ECB increased the ELA to Greece by another large 2.0 billion euros.Two weeks ago, they raised it another 1.1 billion and then last Wednesday they raised it another tiny 200 million euros thus at this point the new maximum was 80.2 billion euros. The ELA is used to replace depositors fleeing the Greek banking system. The bank runs are increasing exponentially. The ECB is contemplating cutting off the ELA which would be a death sentence to Greece and they are as well considering a 50% haircut to all Greek sovereign collateral which will totally wipe out the entire Gr. banking and financial sector.
3t Greece paid the 700 million plus payment to the IMF last Wednesday but with IMF reserve funds. It must be paid back in on June 9.
3 u. If the ECB cuts off Greece’s ELA they would have very little money left to function. So far, they have decided not to cut the ELA
4. USA 10 year treasury bond at 2.13% early this morning. Thirty year rate well below 3% at 2.89% / yield curve flatten/foreshadowing recession.
5. Details Ransquawk, Bloomberg, Deutsche bank/Jim Reid.
(courtesy Jim Reid/Bloomberg/Deutsche bank/zero hedge)
Futures Flat With Greece In The Spotlight; China Boomerangs Higher
Remember China’s 6% crash last week? It is now a distant memory made even more remote thanks to thelatest batch of ugly data out of China, coupled with hints of even more liquidity injections, which led to the latest surge in the Shcomp, an index that has put most pennystocks to shame.
Indeed, while the Hang Seng was up a modest +0.6% overnight, the Shanghai Comp soared higher +4.7% amid further easing expectations, underlined by a disappointing HSBC Mfg PMI print (49.2 vs. Prev. 49.1), which marked the third consecutive contraction as reported earlier. Prices were also supported by reports that China are said to consider doubling its CNY 1 trillion local debt swap program, with the program allowing regional authorities to convert high yielding debts into municipal bonds and effectively lowers financing costs. JGBs softened after shrugging Friday’s gains across German Bunds and USTs as investors were reluctant to chase prices higher ahead of tomorrow’s JPY 2.4trl 10yr auction.
In Europe, the big story remains Greece, and as everyone expected, the doomed country and its creditors failed to make a deal on Sunday. This is after Greek Officials were said to have prepared a draft agreement, which was expected to be announced on Sunday. Not helping things, Greek PM Tsipras came out in fully defiant mode andaccused bailout monitors of making “absurd” demands and seeking to impose “harsh punishment” on Athens.
Separately according to Greek Economy Minister Stathakis, Greece
envisages that they will repay the first tranche of their loans from the IMF on the 5th June, although it was unclear with what money. Finally, Germany’s EU Commissioner Oettinger still believes a deal can be struck this week.
There was also a bunch of final European manufacturing PMI data which came in marginally weaker than the Flash driven by yet another round of Germany weakness which is starting to become a concern: if Germany can’t rebound with a EUR at these levels, where does the European currency have to be: parity? 0.9? 0.8?
The aggregate Euro Area mfg PMI print was 52.2, 0.1% below the previous estimate if 0.2% better than the April number.
From April to May, the German manufacturing PMI fell by 1.1pt to 51.1. In the two first months of Q2, the German manufacturing PMI lost 1.7pt, unwinding the 0.8 gain seen in Q1.The French equivalent expanded by 0.1pt, but still remains at a weak level (49.4). On the other hand, Italian and Spanish momentum remains strong. The Italian manufacturing PMI rose robustly in May (+1.0pt to 54.8). Today’s outturn constitutes another marked sequential improvement for the Italian manufacturing PMI, which has risen by 6.4pt since November. The Spanish manufacturing PMI rose very robustly (+1.6pt to 55.8) and remains the only ‘big-4’ Euro area country with a manufacturing PMI that has consistently been in excess of the 50 threshold in 2014.
Then again, with both Italian and Spanish economic data just as fabricated as America’s soon to be double seasonally adjusted numbers, it is perhaps no wonder why both the EUR and Spanish and Italian bond prices promptly dropped following the report.
The weakness has also spilled into stocks and despite initially opening higher, European equities have continued to drift lower throughout the session as participants remain cautious over Greece. As mentioned above, Greece failed to strike a deal yesterday and Tsipras highlighted the differences between the two camps by referring to proposals as ‘absurd. Nonetheless, Greece are still sticking to their pledge that they will repay the IMF on Friday and can make a deal work.
From a fixed income perspective, Bunds initially traded relatively unchanged as last week’s month-end demand dissipated, with upside capped by the bid tone in equities. However, heading into the US open, Bunds ebbed higher with the move part attributed to a touted liquidation trade out of Italian bonds and into Bunds, at the same time. Gilts are the notable underperformer in the wake of comments from the CBI over the weekend suggesting UK economic growth has risen to its fastest pace for a year, boosting hopes that a slowdown in the first quarter of 2015.
EUR weakness has been observed across the board amid the situation for Greece, which in turn has supported the USD index in what has otherwise been a relatively quiet session for FX markets thus far. Furthermore, FX markets have also been relatively unfazed by the slew of Eurozone manufacturing PMIs this morning which overall painted a promising picture for the periphery. For the UK release, GBP saw a modest bout of selling pressure after the miss on expectations (52.0 vs. Exp. 52.5).
In the energy complex, price action has largely been dictated by the USD-index with overnight gains for WTI and Brent trimmed by broad-based USD strength, while participants also await Friday’s OPEC meeting with the cartel expected to keep production unchanged. In the commodity complex, it is a relatively similar story with spot gold and silver modestly lower, while Copper prices traded marginally higher overnight amid expectations of possible measures from China.
In Summary: European shares rise after largest selloff of month on May 29 while Asian equities little changed. U.S. equity index futures rise with dollar while oil, gold decline. Bund yields little changed as Greek bailout talks continue. U.S. Markit U.S. manufacturing PMI, ISM manufacturing, construction spending, personal income, personal spending due later.
Bulletin Headline Summary from Bloomberg and RanSquawk
- European equities have pared opening gains as participants continue to remain cautious over the Greek situation
with EUR also subsequently weaker - Bunds have been provided a bid tone in recent trade with the move also partially attributed to a touted liquidation
trade out of Italian bonds and into Bunds - Looking ahead, today sees the release of US Construction Spending, ISM Manufacturing and Personal Income and potential comments from Fed’s Fischer and Rosengren
- Treasuries little changed before personal income/spending and ISM manufacturing reports and as Greece and its creditors traded accusations over lack of progress on talks.
- While PM Tsipras wrote in a French newspaper that any intransigence wasn’t the fault of his administration, a senior German lawmaker said it was down to Greece to adhere to reforms agreed to before Tsipras took power
- Greece must make four payments totaling almost EU1.6b to IMF this month; bailout package backed by the euro region expires at the end of June
- China’s official manufacturing PMI was at 50.2 in May vs 50.3 median estimate of economists surveyed by Bloomberg News
- China’s Ministry of Finance may set additional quota of 500b-1t yuan for local governments to swap debt into municipal bonds, according to people familiar with the matter; plan needs State Council approval
- Manufacturing in Spain and Italy grew more than economists forecast last month as the weaker euro helped to boost export competitiveness
- Three U.S. spy programs expired early Monday amid procedural obstacles raised by Senator Rand Paul over legislation to renew them
- Sovereign 10Y bond yields mixed. Asian stocks gain; European stocks lower, U.S. equity-index futures rise. Crude oil and lower, copper little changed
Market Wrap
- S&P 500 futures up 0.2% to 2109.2
- Stoxx 600 up 0.4% to 401.3
- US 10Yr yield up 1bps to 2.13%
- German 10Yr yield little changed at 0.49%
- MSCI Asia Pacific little changed at 151.4
- Gold spot down 0.2% to $1187.7/oz
- Eurostoxx 50 +0.1%, FTSE 100 -0%, CAC 40 +0.3%, DAX -0%, IBEX +0.3%, FTSEMIB +0.3%, SMI +0.7%
- Asian stocks little changed with Chinese bourses outperforming and Taiex, FTSE Straights Times Index underperforming.
- MSCI Asia Pacific little changed at 151.4
- Nikkei 225 little changed, Hang Seng up 0.6%, Kospi down 0.6%, Shanghai Composite up 4.7%, ASX down 0.7%, Sensex up 0.2%
- Euro down 0.6% to $1.092
- Dollar Index up 0.54% to 97.43
- Italian 10Yr yield up 8bps to 1.93%
- Spanish 10Yr yield up 6bps to 1.9%
- French 10Yr yield up 2bps to 0.81%
- S&P GSCI Index down 0.4% to 437.2
- Brent Futures down 0.8% to $65/bbl, WTI Futures down 1% to $59.7/bbl
- LME 3m Copper up 0.2% to $6024.5/MT
- LME 3m Nickel down 0.6% to $12540/MT
- Wheat futures up 0.3% to 478.3 USd/bu
DB’s Jim Reid summarizes the weekend events and previews the busy week
There’s an awful lot going on this week with Friday seeing the latest US payroll number and in theory seeing the long awaited Greek loan repayment deadline with the IMF. However with news late last week that the IMF could bundle Greece’s June repayments to the end of the month, this week’s pivotal moment could be pushed back towards the end of the month assuming a deal is not reached earlier. So the real sting has possibly been removed from the next 5 days. However payrolls will be hotly anticipated as will all the Global PMI/ISM numbers out over the next 24 hours or so. A full week ahead is at the end before the performance review.
We start today with the latest PMIs out of Asia where on the whole the numbers paint a fairly mixed picture. In China the official manufacturing PMI rose 0.1pts to 50.2 (vs. 50.3 expected) to make a six-month high while the equivalent HSCB reading rose 0.1pts to 49.2 as expected, although remained below 50 for the third consecutive month. The official non-manufacturing PMI continues to disappoint, sliding 0.2pts to 53.2 and to the lowest level since December 2008. Over in Japan, there were no changes versus the initial flash estimate of the May manufacturing PMI of 50.9.
As well as the data perhaps signally more economic stimulus ahead for China, headlines on Bloomberg suggesting that Chinese policy makers are considering to double the size of local-bond swap program this morning have given markets a lift. The article suggests that in the second stage of the programme, up to 1tn yuan of local-government loans would be authorized to be swapped into bonds at the hands of cities and provinces. The Shanghai Comp (+2.77%), CSI 300 (+2.91%) and Shenzhen (+3.54%) have all taken a steep leg higher once again this morning. Bourses elsewhere are generally weaker however with the Nikkei (-0.39%), Kospi (-0.75%) and ASX (-1.02%) in particular trading lower.
So back to Greece. Weekend talks between the Greek government and its Creditors ended without agreement with the key sticking points around fiscal targets and pension and labour reforms still outstanding. Despite PM Tsipras saying that talks were ‘constructive’ between himself and Germany’s Merkel and France’s Hollande, as well as comments from the EU’s Oettinger that he sees a chance of Greek solution in the coming days, there was a familiar defiant stance from Tsipras and one which showed signs of strain in an op-ed published by French newspaper Le Monde on the weekend. In it, Tsipras said that ‘the lack of an agreement so far is not due to the supposed intransigent, uncompromising and incomprehensible Greek stance’, but rather ‘it is due to the insistence of certain institutional actors on submitting absurd proposals and displaying a total indifference to the recent democratic choice of the Greek people’. Meanwhile, a senior Eurozone official was quoted in the Guardian as saying that ‘it is a lie that there is any optimism, there is no optimism’ and that ‘what the so-called optimism is about is stopping the panic-stricken Greeks withdrawing deposits from banks’.
All outcome paths still remain open in what’s still a critical week, although the potential for bundling payments (which the IMF confirmed Greece have yet to enquire about) could well mean this drags on slightly further as mentioned. In the meantime, expect headlines to only intensify as we move towards Friday.
Recapping markets on Friday, a softer than expected Chicago PMI (46.2 vs. 53.0 expected) in the US saw equity markets decline and Treasury yields fall modestly. Indeed, supported by weakness for industrial and financial names, the S&P 500 (-0.63%) and Dow (-0.64%) both declined on Friday to cap a relatively weak week for equities. Treasury yields were a touch lower at the close, with the benchmark 10y yield falling 1.4bps to 2.121% and back to more or less where it was at the start of the month. The Dollar was fairly unmoved for the most part with the DXY ending 0.06% lower. It was a different story in commodity markets however as both WTI (+4.54%) and Brent (+4.76%) wiped out a decent chunk of the losses this month to close at $60.30/bbl and $65.56/bbl respectively and recording the highest one day gains since 15th April, seemingly buoyed by the latest oil rig count data.
Back to the data, as well as missing expectations, the Chicago PMI also fell 6.1pts from April’s print and in turn taking it back below 50. Despite printing sub-50 in both February (45.8) and March (46.3), the weak readings then were largely blamed on cold weather and the ports strike, particularly following the rebound in April. However, the stronger Dollar appears to be weighing down on production and Friday’s data will likely put more pressure on today’s ISM manufacturing reading. Away from the Chicago PMI, there was also some weakness in the ISM Milwaukee (47.7 vs. 50.0) while the final May University of Michigan consumer sentiment print was revised up to 90.7 from 88.6 previously, the lowest monthly reading this year however. The other notable data point from Friday was the second revision to Q2 GDP, with the downgrade to -0.7% qoq (from the initial +0.2%) less than consensus forecasts of -0.9% while the core PCE was revised down one-tenth of a percent to +0.8% qoq.
It was a similar picture in Europe on Friday as US data and Greece headlines largely dictated market direction. The Stoxx 600 (-1.71%), DAX (-2.26%) and CAC (-2.53%) all fell while Greek equities ended 1.44% lower. Aside from a 3bps move higher in yield for 10y Portugal bonds, yields fell across most of Europe on Friday. Indeed, 10y Bunds ended 4.2bps lower at 0.485% while both Italy (-1.7bps) and Spain (-0.2bps) also tightened modestly. Greek 10y yields meanwhile closed 12.5bps wider at 10.86%. In terms of Friday’s data in Europe, French consumer spending (+0.1% mom vs. +0.4%) was weak in the month of April, while in Germany, retail sales (+1.7% mom vs. +1.0% expected) were strong, making up for declines in February and March. Due to a base effect, the yoy rate was limited at +1.0% but our colleagues in Germany noted that sales were still up by 2.8% yoy on average over the last three months.
Onto this week’s calendar now and there’s plenty for us to look forward to. It starts this morning in Europe where we get the final May manufacturing PMI readings for the Euro area and also regionally, before we then see the preliminary May CPI report out of Germany. In the US this afternoon, the PCE core and deflator readings will be closely watched while we also get personal income and spending data. Later this afternoon, we also get the final May manufacturing PMI along with construction spending and also ISM manufacturing and prices paid. Tuesday starts in Japan where we are due to get cash earnings and monetary base data. In the European session we’ll get German unemployment along with the all important advanced May Euro Area CPI print. Euro area PPI is also due along with UK mortgage approvals. In the US on Tuesday we’ve got the ISM NY to look forward to along with factory orders, the IBD/TIPP economic optimism survey and finally vehicle sales data. In Asia on Wednesday we’ve got the May services and composite PMI prints to start things off for Japan and China. We’ll then get these also for the Euro area before the ECB meeting around midday. US data is highlighted by the April trade balance which will be important in the context of Q2 GDP, while we also get an early payrolls indicator with the May ADP employment change print. Also in the US on Wednesday, we’ll get the final composite and services PMI’s along with the May ISM non-manufacturing reading and also the Fed’s Beige Book. There’s more Central Bank action on Thursday with the BoE due to meet, while the only notable data release in the morning will be French unemployment. Nonfarm productivity, unit labour costs and initial jobless claims are the highlights in the US on Thursday. In Asia on Friday we’ve got the Conference Board leading indicator for Japan due up. In Europe the preliminary Q1 GDP report for the Euro area will be closely watched. This all comes before the all important US payrolls print on Friday afternoon with current consensus running at 225k (+2k on April). We’ll also get the usual associated employment indicators including average hourly earnings and unemployment prints. Fedspeak wise we’ve got Rosengren, Evans, Tarullo and Dudley all due to speak while on the ECB side Liikanen, Mersch and Knot are expected. Of course, Greece headlines will continue with the June 5th IMF payment due on Friday
end
I believe now we have a complete picture as to the how the Greek situation will unfold. Pay attention to the following two commentaries from Hans Werner Sinn and Alasdair Macleod.
First some facts:
1. The Greek banks last year had over 240 billion euros on deposit and as of April 30/2015 only 133.7 billion euros.
2. Over 40% of Greek bank deposits are bad (equal to approximately 100 billion euros)
3. Over 40% of tier one assets of Greek banks is made up of phony tax deferred credits.
4. The ECB has given the Greek banks 80.2 billion euros of emergency ELA to keep the banks afloat.
5. According to Sinn and Macleod, the Greek citizens have taken a lot of euros out of the country via two methods:
i) loans to which they purchase assets (stuff) or financial assets (German bunds). Approximately 56 billion euros have been taken out through this method, mainly corporates.
ii) straight withdrawals of cash and with this cash they buy assets (approximately 43 billion euros)
These show up at the ECB as Target 2 balances. Greece has a debit of 99 billion euros of Target 2 balance to credit nations like Germany, Austria and Finland. The total of all target 2 balances are over 1 trillion euros. However for this discussion we will only refer to the money that Greece owes.
The 99 billion euros of Target 2 balances will be lost if Greece defaults and this money can come back to Greece in Euros unharmed after Greece reverts to Drachmas.
Thus of the 133.7 billion euros of deposits, most depositors are below the 100,000 Euro threshold where their deposits cannot be confiscated. Also many corporates have undergone loans (via the target 2 route) to sanitize their balance sheet and these sums also cannot be confiscated as the Greek loans of euros (on their corporate balance sheet) have cash as collateral for these loans and thus untouchable on a bail in.
6. If Greece goes bankrupt probably half of the target 2 balances will be recoverable or 42 billion euros. Thus it is safe to assume that the ECB will lose 122 billion euros.
Now what about the loans on the ECB balance sheet?
Financial writers have somehow forgot that in 2012, the ECB took the huge purchases of bonds off the hands of the big French and Germany banks in a swap for freshly minted Euros. On a default these bonds must be reswapped back to the German and French banks. This is why Macleod states that the only loss to the ECB will be 122 billion euros and not the 200+ billion of bonds currently sitting on the ECB balance sheet.
The ECB will not suffer any losses on the Greek bonds swapped in 2012 as they must be reswapped back to the commercial banks and thus these banks will undergo huge losses to their shareholders.
What is worse, is that these banks used the Greek bonds as tier one assets and leveraged these bonds at least 26 times. On top of this, we have derivatives on these bonds are 100 x the original collateral. Thus the entire total of 330 billion of Greek debt, (derived from the original collateral) will no doubt have over 3-4 trillion of derivatives that will blow up on a default. This will bring down all of Europe together with the major French banks (BNPParibas, Soc Generale) and German banks (Deutsche bank). Bill Holter has been commenting on this for the past several weeks.
This is the background to the following two commentaries…
(courtesy Herman Werner Sinn/Alasdair Macleod)
Hans-Werner Sinn Warns Europe – Don’t Underestimate Varoufakis
Authored by Hans-Werner Sinn, originally posted at Project Syndicate,
Game theorists know that a Plan A is never enough. One must also develop and put forward a credible Plan B – the implied threat that drives forward negotiations on Plan A. Greece’s finance minister, Yanis Varoufakis, knows this very well. As the Greek government’s anointed “heavy,” he is working Plan B (a potential exit from the eurozone), while Prime Minister Alexis Tsipras makes himself available for Plan A (an extension on Greece’s loan agreement, and a renegotiation of the terms of its bailout). In a sense, they are playing the classic game of “good cop/bad cop” – and, so far, to great effect.
Plan B comprises two key elements:
First, there is simple provocation, aimed at riling up Greek citizens and thus escalating tensions between the country and its creditors. Greece’s citizens must believe that they are escaping grave injustice if they are to continue to trust their government during the difficult period that would follow an exit from the eurozone.
Second, the Greek government is driving up the costs of Plan B for the other side, by allowing capital flight by its citizens. If it so chose, the government could contain this trend with a more conciliatory approach, or stop it outright with the introduction of capital controls. But doing so would weaken its negotiating position, and that is not an option.
Capital flight does not mean that capital is moving abroad in net terms, but rather that private capital is being turned into public capital. Basically, Greek citizens take out loans from local banks, funded largely by the Greek central bank, which acquires funds through the European Central Bank’s emergency liquidity assistance (ELA) scheme. They then transfer the money to other countries to purchase foreign assets (or redeem their debts), draining liquidity from their country’s banks.
Other eurozone central banks are thus forced to create new money to fulfill the payment orders for the Greek citizens, effectively giving the Greek central bank an overdraft credit, as measured by the so-called TARGET liabilities. In January and February, Greece’s TARGET debts increased by almost €1 billion ($1.1 billion) per day, owing to capital flight by Greek citizens and foreign investors. At the end of April, those debts amounted to €99 billion.
A Greek exit would not damage the accounts that its citizens have set up in other eurozone countries – let alone cause Greeks to lose the assets they have purchased with those accounts. But it would leave those countries’ central banks stuck with Greek citizens’ euro-denominated TARGET claims vis-à-vis Greece’s central bank, which would have assets denominated only in a restored drachma. Given the new currency’s inevitable devaluation, together with the fact that the Greek government does not have to backstop its central bank’s debt, a default depriving the other central banks of their claims would be all but certain.
A similar situation arises when Greek citizens withdraw cash from their accounts and hoard it in suitcases or take it abroad. If Greece abandoned the euro, a substantial share of these funds – which totaled €43 billion at the end of April – would flow into the rest of the eurozone, both to purchase goods and assets and to pay off debts, resulting in a net loss for the monetary union’s remaining members.
All of this strengthens the Greek government’s negotiating position considerably. Small wonder, then, that Varoufakis and Tsipras are playing for time, refusing to submit a list of meaningful reform proposals.
The ECB bears considerable responsibility for this situation. By failing to produce the two-thirds majority in the ECB Council needed to limit the Greek central bank’s self-serving strategy, it has allowed the creation of more than €80 billion in emergency liquidity, which exceeds the Greek central bank’s €41 billion in recoverable assets. With Greece’s banks guaranteed the needed funds, the government has been spared from having to introduce capital controls.
Rumor has it that the ECB is poised to adjust its approach – and soon. It knows that its argument that the ELA loans are collateralized is wearing thin, given that, in many cases, the collateral has a rating below BBB-, thus falling short of investment grade.
If the ECB finally acknowledges that this will not do, and removes Greece’s liquidity safety net, the Greek government would be forced to start negotiating seriously, because waiting would no longer do it any good. But, with the stock of money sent abroad and held in cash having already ballooned to 79% of GDP, its position would remain very strong.
In other words, thanks largely to the ECB, the Greek government would be able to secure a far more favorable outcome – including increased financial assistance and reduced reform requirements – than it could have gained at any point in the past. A large share of the acquired resources measured by the TARGET balances and the cash that has been printed would turn into an endowment gift for an independent future.
Many people in Europe seem to believe that Varoufakis, an experienced game theorist but a political neophyte, does not know how to play the cards that Greece has been dealt. They should think again – before Greece walks away with the pot.
end
Euro-sclerosis
Submitted by Alasdair Macleod via GoldMoney.com,
There appears to be little or nothing in the monetarists’ handbook to enable them to assess the risk of a loss of confidence in the purchasing power of a paper currency. Furthermore, since today’s macroeconomists have chosen to deny Say’s Law, otherwise known as the laws of the markets, they have little hope of grasping the more subtle aspects of the role of money in price formation. It would appear that this potentially important issue is being ignored at a time when the Eurozone faces growing systemic risks that could ultimately challenge the euro’s validity as money.
The euro is primarily vulnerable because it has not existed for very long and its origin as money was simply decreed. It did not evolve out of marks, francs, lira or anything else; it just replaced the existing currencies of member states overnight by diktat. This contrasts with the dollar or sterling, whose origins were as gold substitutes and which evolved in steps over the last century to become standalone unbacked fiat. The reason this difference is important is summed up in the regression theorem.
The theorem posits that money must have an origin in its value for a non-monetary purpose. That is why gold, which was originally ornamental and is still used as jewellery endures, while all government currencies throughout history have ultimately failed. It therefore follows that in the absence of this use-value, trust in money is fundamental to modern currencies.
The theorem explains why we can automatically assume, for the purposes of transactions, that prices reflect the subjective values of the goods and services that we buy. This is in contrast with money that is not consumed but merely changes hands, and both parties in a transaction ascribe to money an objective value. And this is why the symptoms of monetary inflation are commonly referred to as rising prices instead of a fall in the purchasing power of money.
The European Central Bank (ECB) is plainly assuming the euro is money on a par with any other major currency with a longer history. Despite caution occasionally expressed by sound-money advocates in Germany’s Bundesbank, the ECB is aggressively pursuing monetary policies designed to weaken its currency. For example, it has reduced its deposit rate for Eurozone banks to minus 0.2%. This is wholly unnatural in a world where possession of money is always more valuable than an IOU. Furthermore banks are encouraged to limit their customers’ cash withdrawals, often under the guise of fighting tax evasion or money laundering. But in Greece restrictions on cash withdrawals are clearly designed to protect the banks.
So far, there is nothing identified in this article that actually points to a destabilisation of the euro, other than it’s generally a bad idea to fool around with peoples’ rights to it. But lets assume for a moment that Greece defaults. In that case the Greek banking system would certainly collapse (assuming the ECB suspends its emergency liquidity assistance (ELA) because bad debts already on their balance sheets exceed tangible equity by a substantial margin. If that assistance is withdrawn, some €80bn of ELA will be lost. Furthermore, TARGET2 2 settlement imbalances at the other Eurozone central banks, which have arisen through capital flight from Greece and which are guaranteed by the ECB, total a further €42bn. This leaves the ECB in the hole for €122bn. Unfortunately, the ECB’s equity capital plus reserves total only €96bn, so a Greek default would expose the euro’s issuing bank to be woefully under-capitalised.
Therefore, if Greece defaults we would at least expect the validity of this relatively new euro to be challenged in the foreign exchange markets. Even if the ECB decided to rescue what it could from a Greek default by rearranging the order of bank creditors in its favour through a bail-in, it would still have to make substantial provisions from its own inadequate capital base. For this reason, rather than risk exposing the ECB as undercapitalised, it seems likely that Greece will be permitted to win its game of chicken against the Eurozone, forcing the other Eurozone states to come up with enough money to pay off maturing debt and cover public sector wages. So will that save the euro?
Perhaps it will, but if so maybe not for long. If the Eurozone’s finance ministers give in to Greece, it will be harder for other profligate nations to impose continuing austerity. Anti-austerity parties, such as Podemas in Spain, are increasingly likely to form tomorrow’s governments, and Spain faces a general election later this year. Prime Minister Renzi and President Hollande in Italy and France respectively are keen to do away with austerity and increase government spending as their route to economic salvation. Unfortunately for both the undercapitalised ECB and its young currency, they are increasingly likely to be caught in the crossfire between the Northern creditors and the profligate borrowers in the South.
Even if Greece is to be saved from default, the ECB will need to strengthen the Greek banks. This is likely to be done in two ways: firstly by forcing them to recapitalise with or without bail-ins, and secondly to restrict money outflows through capital controls and harsh limits on depositor withdrawals if need be. Essentially it is back to the Cyprus solution.
Whichever way Greece is played, Eurozone residents will see themselves having a currency that is becoming increasingly questionable. The bail-in debacle that was Cyprus is still etched in depositors’ minds. Cyprus certainly has not been forgotten in Greece, where ordinary people are now resorting to buying mobile capital goods that can be easily sold, such as German automobiles, with the bank balances that cannot be withdrawn in cash and are otherwise at risk from a Cyprus-style bail-in. Greek depositors have realised that euro balances held in the banks are not reliably money. Folding cash is still money, but that is all, and furthermore the folding stuff is rationed.
The next blow for the euro could come from the exchange rate. If the euro continues to lose purchasing power on the foreign exchanges, it is likely to undermine confidence on the ground. And when that happens it will be increasingly difficult for the ECB to retrieve the situation and maintain the euro’s credibility as money. It just doesn’t seem sensible to take such enormous risks with a currency that has existed for only thirteen years.
end
Greek Default, Deposit Blocks, New Government “May Be Necessary” To End Impasse, Goldman Says
Over the past several days it’s become increasingly clear that the endgame in Greece will involve some manner of political shakeup in Athens.
As we’ve said all along, the troika wants — no, needs — to force Greek PM Alexis Tsipras into conceding Syriza’s election mandate or risk emboldening leftist movements across the periphery. The necessity of remaining resolute when it comes to demanding complete surrender from Athens was made all too clear when recent regional and local elections in Spain showed a groundswell of support for Podemos and many progressive, anti-austerity candidates (we’ll leave aside the fact there was never any real ‘austerity’ in the first place).
Greece and creditors missed a self-imposed Sunday deal deadline and, in what seemed like an admission that discussions have become intractable, Tsipras penned a lengthy statement over the weekend which blamed creditors for the stalemate and warned that democracy in Europe was threatened by those who wish to create a two-tiered EMU wherein weaker nations are essentially governed from on high by the institutions and EU paymaster Germany. Additionally, Syriza’s far-left radicals look set to split with Tsipras, forcing a government reshuffle in order to get a deal passed through parliament.
Today, Goldman is out reinforcing all of the above noting that in the end, it simply is not possible for Syriza to keep its election promises and secure a deal with the troika.
Via Goldman (on the political aspect):
On the one hand, the European authorities are committed to a framework based on three key principles:
- Retaining the Euro requires further economic adjustment in Greece;
- To the extent that this adjustment entails further financial support (which is self-evident given upcoming obligations), that support will only be provided on the basis of conditionality.
- In order to assess compliance with such conditionality, external oversight of the Greek economy is required.
A departure from these principles would not only represent an overturning of the existing process and risk fuelling moral hazard in Greece and elsewhere. It is also simply politically unacceptable in other Euro area countries (those that have made painful economic adjustments in the past, those that face domestic political challenges from populist parties, and those that underwrite the financial risks associated with further support). And a third programme requires unanimity across Euro area member states.
In short, even if the labels change, a third programme for Greece to facilitate the economic and financial adjustments needed to sustain its membership of the Euro area entails a new memorandum and a continuation of the troika.
On the other hand, the Greek government was elected on a platform that promised continued membership of the Euro area but without the austerity, adjustment and oversight that came with the troika programme. Departing from this position requires a change in the political mandate on which the Greek government operates…
Euro exit is a political decision. For sure, the Greek authorities could decide to exit in a unilateral manner. But the current Greek government has no mandate to do so: if it announced an intention to leave the Euro area pre-emptively, in our view the government would likely fall.Moreover, there is no process for Euro exit defined in the governing European treaties: the practical and legal challenges could not be resolved overnight…
Viewed first through a political lens, this situation serves to clarify the choice facing the Greek economy. Under the maintained assumption that the European authorities do not give way on their three key principles listed above, the intensification of the liquidity shortage will demonstrate that the platform on which the current Greek government was elected is simply infeasible: the Greeks cannot “have their cake and eat it”, retaining the Euro but not implementing adjustment. A hard choice has to be made between (a) Euro exit and (b) adjustment to remain part of the single currency.
Making that choice entails finding a new mandate to govern. This will have to be sought from the electorate, implying a new government, new elections or a referendum (or various combinations of the three).
And here’s Goldman on the harsh economic realities facing Greece and its citizens:
The domestic sector with an immediate, direct exposure to the liquidity squeeze is the government and – by implication – those segments of society that rely on it: public sector workers, pensioners, government suppliers and contractors. While the lattermost are feeling the liquidity squeeze as the government falls into arrears on its contractual payments, public workers and pensioners have maintained a privileged position.
Indeed, it is the explicit policy of the Greek authorities to prioritise paying public wages and pensions ahead of meeting external financial obligations.
While the government has access to liquidity, this privileged status confers a form of seniority to the claims public workers and pensioners hold on the government. And unsurprisingly, those parts of society that benefit from such seniority prefer to maintain the status quo rather than accept an adjustment programme (that is likely to involve pension, job and/or wage cuts for public employees).
But as the liquidity squeeze intensifies and cash reserves are exhausted, the seniority enjoyed by pensioners and public sector workers evaporates. Being first in the queue does not help when there is no cash left. At that point, the claims of pensioners and public workers become pari passu with other claims on the Greek government.
The implications of this pari passu status can take several concrete forms. The government may pay pensions using IOUs (‘scrip’). Such bearer claims on the government may circulate in a form of parallel currency. But they will trade at a discount to Euro banknotes if the government is unable to redeem them in ‘hard’ currency – as would be the case in the event of technical default and exhaustion of cash reserves.
Alternatively, the government may pay public workers with cheques drawn on Greek banks. But with the banks lacking access to liquidity, those cheques cannot be cashed – bank deposits would have to be blocked.
Either way, the claims of pensioners and public sector workers on the government are worth less than their par Euro value…
But – as the preceding discussion emphasises – the ongoing negotiations between Greece and its official creditors are intensely political. And forward-looking economic rationality is not characteristic of such interactions.
Not only is it possible that we may need to see technical default and deposit blocks in order to come to a new programme, it may be necessary to do so in order to break the current impasse in negotiations.
As a reminder, Greece’s pension obligations amount to a greater share of GDP than any other nation in the eurozone:
Meanwhile, Jean-Claude Juncker’s official spokesperson, Mina Andreeva indicates that Brussels was not amused with Tsipras and his Hemingway references:
And it now appears there’s further dissension within Syriza as the radial faction doesn’t seem to think the appointment of a pro-bailout representative is appropriate under the circumstances.
Via Reuters:
Greek Prime Minister Alexis Tsipras faced a backlash on Sunday from his leftist party lawmakers over the government’s pick for the country’s representative at the International Monetary Fund, the latest issue to deepen divisions in the ruling party.
The rift was triggered by the choice of Elena Panaritis, a member of Greece’s financial crisis negotiating team and parliamentary deputy for the center-left PASOK party from 2009 to 2012, to replace Thanos Katsambas at the IMF.
In a letter sent to Tsipras on Sunday, some 40 deputies from his anti-bailout Syriza party opposed Panaritis’ appointment and asked for it to be withdrawn. They said her views conflicted with the party’s program since she held a post at PASOK when it supported bailout policies.
“A prominent representative of bailout policies cannot represent the government,” the lawmakers said in a letter published on a Syriza-affiliated website. “It’s not a symbolic but a political issue. It’s a wrong decision and we ask that it is taken back.”
As if on cue:
Greece’s appointed representative at the IMF Elena Panaritis says in e-mailed statement that she can’t accept post amid negative reactions from Syriza lawmakers.
We’ll close with a quote from Germany, where the political will to negotiate is quite clearly exhausted. From German spokesman Steffen Seibert:
“Summarized in a sentence: Greece must agree a comprehensive reform package with the three institutions.”
Russian Pivot: Greece Will “Probably” Join BRICS Bank, Official Says
Greece has very little in the way of bargaining power with European creditors.
Outside of gimmicks like tapping its SDR reserves, Athens has no cash to make payments to the IMF in June and, perhaps more importantly, there’s very little in the way of wiggle room when one looks at revenues versus spending (see below), meaning Greece will also struggle to pay public sector employees which, in combination with Greeks’ consternation about the safety of their deposits, could contribute to social unrest and put unwelcome political pressure on PM Alexis Tsipras and his Syriza party that swept to power just five months ago on a defiant (and apparently naive) anti-austerity platform.
The troika (and Germany) knows this of course and they are also acutely aware that Spain’s Podemos and Portugal’s Socialists are watching the Greek drama closely for the slightest indication of concessions from the IMF or from the EU. In other words, the standoff is now just as much about politics as it is about economics, and the ‘institutions’ do not want any Syriza sympathizers to be able to say that Greece made anyone blink by threatening an exit from the currency bloc.
What all of the above means is that for better or worse, Greece has essentially no leverage because for many European officials, trading austerity concessions for the right to maintain the idea of euro indissolubility is no longer a desirable outcome as it could embolden anti-austerity governments in larger, more influential countries.
All of that said, Greece still has one card to play: the so-called ‘Russian pivot’. Over the course of negotiations between Syriza and the troika Moscow has, at various times, sought to take advantage of the hostilities between Athens and Brussels by making a series of overtures including the possibility of a €5 billion advance on Greece’s portion of the Turkish Stream natural gas pipeline and an invitation for the country to join the BRICS bank, a possibility Goldman’s Jim O’Neill wrote off as a politically-motivated “joke.”
But Vladimir Putin isn’t fond of joking (unless he’s participating in his yearly town hall meeting with the Russian people) and sure enough, less than two months ahead of this year’s BRICS Summit in Ulfa, it appears Greece may accept Moscow’s invite.
Enikos has more:
Greece is preparing and will probably submit a request to participate in the new development bank for BRICS countries and has secured Russia’s support on the issue, Productive Reconstruction, Environment and Energy Minister Panagiotis Lafazanis told ANA-MPA news agency on Friday evening.
“During my meeting with Russian Deputy Finance Minister Sergey Storchak, we secured the decisive Russian support to Greece’s request for participation in the new development bank of BRICS countries. The relevant request for Greece’s participation…will be symbolic and will be paid in installments, while right after operations begin, it will be able to accept financial support,” the minister said.
Lafazanis added that technical details were also discussed on how to submit the request so that it will be accepted after discussions within the Greek government conclude.
He also noted that he also discussed the credit facility that will be provided by Russian banks to the Greek company which will undertake the construction of the new gas pipeline which will cross Greece.
“Repayment of the Russian loan will be achieved by the profits made through the operation of the pipeline and this facility is not related to loans or economic assistance between states,” he said.
As mentioned above, this comes as Russia, Brazil, India, China, and South Africa are set to officially launch the BRICS bank and a related reserve pool when the group of emerging powers convenes on July 8-9 in Russia. It also comes as Moscow looks set to put plans for a Eurasian currency bloc into motion and as the Central Bank of Russia explores the possibility of establishing a BRICS-associated alternative to SWIFT.
Additionally, China’s recent $50 billion commitment to Brazil underscores the degree to which BRICS nations are expanding their economic and political cooperation in the face of declining Western hegemony. The BRICS bank speaks to the idea that the world’s most influential emerging markets now feel it necessary to support each other in the face of what they view as a half-hearted attempt on the part of the world’s existing multilateral institutions to serve EM interests or even to give them representation that’s comparable to their place in the world economy. Here’s what we said on Friday:
Much like the China-led AIIB, the BRICS bank is in many ways a response to the failure of US-dominated multilateral institutions to meet the needs of modernity and offer representation that’s commensurate with the economic clout of its members.
Why would Russia want Greece to join the bank? The motivation is clearly geopolitical consdering that Greece is broke, and what’s interesting about the statement from Lafazanis is that it appears to suggest that Greece’s paid in capital would come in installments while Athens would immediately be eligible for a loan from the bank.
In short, Putin would like nothing better than to establish a symbolic relationship with the first country to break from the supposedly indissoluble currency bloc, especially given the situation in Ukraine. Meanwhile, Greece is out of leverage, especially now that recent regional and municipal elections in Spain have proven to Athens’ EU creditors that the austerity (or, ‘fauxterity‘ as we’re fond of calling it) revolt is very real. We’ll see what, if any, impact this latest Russian pivot trial balloon has on Greek debt deal negotiation.
end
As we indicated last week, the Syriza party is splintered:
(see the above Goldman Sachs commentary that they need a new election to break the impasse)
(courtesy zero hedge)
Defiant Tsipras Warns European Leaders They Are “Making A Grave Mistake”
We’ve said repeatedly that negotiations between Greece and the troika are just as much about politics as they are about economics although, in the final analysis the two are inextricably related especially as it relates to the anti-austerity contagion in the EU. In “Democracy Under Fire: Troika Looks To Force Greek Political ‘Reshuffle’” we said the following about the “institutions’” bargaining stance:
It is becoming increasingly clear that the Syriza show will ultimately have to be canceled in Greece (or at least recast) if the country intends to find a long-term solution that allows for stable relations with European creditors, but as we’ve noted before, it may be time for Greeks to ask themselves if binding their fate to Europe is in their best interests given that some EU creditors seem to be perfectly fine with inflicting untold economic pain upon everyday Greeks if it means usurping the ‘radical leftists.’
We also highlighted the following set of possible outcomes projected by Barclays:
Political change could emerge through: 1) a government re-shuffle with more radical members exiting; 2) a referendum; or 3)snap elections. We think that the first scenario is the most likely, which would seem the least disruptive, allowing Greece to ‘return’ to a programme agreement before end-June. Importantly, we think that the Eurogroup could find ways to bridge temporary funding gaps (eg, by disbursing SMP profits or raising the T-bill ceiling), if it deemed the prospects for successfully finalising programme negotiations were good.
With negotiations running into the eleventh hour ahead of a Friday IMF payment and with everyone’s patience running dangerously thin, it appears as though the situation described above is playing out almost to a tee.
On Sunday, PM Alexis Tsipras penned a lengthy statement expressing his frustration at creditors’ insistence on presenting what he calls “absurd proposals” even as the Greek delegation has gone most of the way towards meeting the troika’s demands. He also questions the utility of the “coordinated” leaks from certain EU and IMF officials regarding a lack of progress, hitting back against those who have in the past advised the Greek government against leaking statements to the press and tacitly suggesting that there is indeed a behind-the- scenes effort to spark a terminal bank run in order to force Syriza into conceding its entire mandate (something we’ve said time and again). Here are the highlights:
On 25th of last January, the Greek people made a courageous decision. They dared to challenge the one-way street of the Memorandum’s tough austerity, and to seek a new agreement. A new agreement that will keep the country in the Euro, with a viable economic program, without the mistakes of the past…
Doing so requires a mutually beneficial agreement that will set realistic goals regarding surpluses, while also reinstating an agenda of growth and investment. A final solution to the Greek problem is now more mature and more necessary than ever…
Many, however, claim that the Greek side is not cooperating to reach an agreement because it comes to the negotiations intransigent and without proposals…
Let’s be clear:
The lack of an agreement so far is not due to the supposed intransigent, uncompromising and incomprehensible Greek stance.
It is due to the insistence of certain institutional actors on submitting absurd proposals and displaying a total indifference to the recent democratic choice of the Greek people, despite the public admission of the three Institutions that necessary flexibility will be provided in order to respect the popular verdict.
What is driving this insistence?
My conclusion… is that the issue of Greece does not only concern Greece; rather, it is the very epicenter of conflict between two diametrically opposing strategies concerning the future of European unification.
The first strategy aims to deepen European unification in the context of equality and solidarity between its people and citizens.
The second strategy seeks precisely this: The split and the division of the Eurozone, and consequently of the EU.
The first step to accomplishing this is to create a two-speed Eurozone where the “core” will set tough rules regarding austerity and adaptation and will appoint a “super” Finance Minister of the EZ with unlimited power, and with the ability to even reject budgets of sovereign states that are not aligned with the doctrines of extreme neoliberalism.
For those countries that refuse to bow to the new authority, the solution will be simple: Harsh punishment. Mandatory austerity. And even worse, more restrictions on the movement of capital, disciplinary sanctions, fines and even a parallel currency.
Judging from the present circumstances, it appears that this new European power is being constructed, with Greece being the first victim. To some, this represents a golden opportunity to make an example out of Greece for other countries that might be thinking of not following this new line of discipline.
If you think that sounds like precisely what we have been saying in these pages for months you’d be right.
Tsipras concludes as follows:
Which strategy will prevail? The one that calls for a Europe of solidarity, equality and democracy, or the one that calls for rupture and division?
If some, however, think or want to believe that this decision concerns only Greece, they are making a grave mistake. I would suggest that they re-read Hemingway’s masterpiece, “For Whom the Bell Tolls”.
Tsipras is thus acutely aware of the fact that the negotiations between his government and the troika are now considered by both creditors and by sympathetic political parties across the EU periphery as a testing ground for the notion that threatening the idea of euro indissolubility can be used as a bargaining chip on the way extracting austerity concessions from the IMF and Brussels.
So what happens next? As Barclays notes, a government reshuffle could be the most likely scenario with the more radical members of Syriza staging an open revolt and forcing Tsipras to form a new government, an outcome which would suit the troika just fine and which would prove that despite the PM’s extreme misgivings about the subversion of the democratic process, the country’s creditors will ultimately succeed in forcing Greeks to decide between an economic catastrophe that will likely be orders of magnitude greater than what they faced in the past and remaining free to decide for themselves how they want to be governed.
Or, visually…
Indeed, this scenario has already begun to play out. The Telegraph has more:
Greek prime minister Alexis Tsipras is facing open rebellion in his ruling Syriza party over Greece’s future in the eurozone, raising the spectre of snap elections being called as early as this month.
The extreme “Left Platform” faction of Syriza, who make up a third of the party’s membership, have promised to defy creditor powers, and called for a reinstitution of the drachma, as the government enters its fifth month of arduous bail-out negotiations.
Syriza member Stathis Kouvelakis, who has led the insurrection, has vowed to end his country’s ritual “humiliation” at the hands of the International Monetary Fund, European Commission, and European Central Bank.
“It has become now clear that the ‘institutions’ are not striving for what some are calling an ‘honourable compromise’” said Mr Kouvelakis, in a statement…
Latest polling shows that 58pc of Syriza supporters would prefer to return to the drachma rather than continue implementing Troika austerity measures…
The insurrection poses a domestic headache for Mr Tsipras, who will have to pass any bail-out agreement though his country’s 300-member parliament.
Holding only a 12-seat majority, failure to ratify an agreement would trigger a snap election and likely lead to an extreme Left breakaway, said Miranda Xafa, a Greek economist and senior scholar at the Center for International Governance Innovation.
“There are indications that Mr Tsipras is ready to ditch his extremists should he lose a vote, but it will be very hard for him to come up with a face saving deal,” said Ms Xafa…
“In any new election scenario, Syriza would be split and the Left wing would likely break off to form a separate party. Mr Tsipras would have to find new coalition partners,” added Ms Xafa.
As a reminder, it was just last week that the countrycame within 20 votes of backing a euro exit.
In a surprisingly close vote showing just how deeply the ruling Greek Syriza party has splintered, the hard line “Left Platform” a faction within Syriza, proposed that Greece stop paying its creditors if they continue with “blackmailing tactics” and instead seek “an alternative plan” for the debt-racked country. Its motion called for the government to default on the IMF loans rather than compromise to creditor demands. The proposal was narrowly rejected with 95 people voting against and 75 in favor. With a vote as close as that, the genie of the full-blown dissent within Syriza, which has a tiny majority of just 12 seats in Greece’s 300 seat partliament, is out of the bottle which could mean that the Troika’s long sought after goal of pushing Greece into a political crisis, may be just around the corner.
What seems clear from the above is that this situation cannot be resolved without some manner of political (and possibly social) upheaval in Greece. While we do not yet know what Greek citizens will do in the event Tsipras strikes a deal that entails more austerity but averts a euro exit, what we do now know is that some members of Syriza are determined to stick to the campaign promises that got them elected in January and given that those promises have proven utterly incompatible with what the troika wants to hear on the way to bailing the country out (again), a political shakep seems virtually assured as it is unlikely Tsipras will risk an outright default and the economic consequences that will invariably accompany it.
Here’s a useful flow chart that maps the possibilities…
…and here’s the latest opinion poll…
Stay tuned — things just got a lot more interesting in Athens.
end
An anatomy of a Greek bank run;
(courtesy Tom Winnifrith/Share Prophets)
A First-Hand Account Of The Greek Bank Run
Submitted by Tom Winnifrith of Share Prophets
Witnessing the great bank run first hand as I deposit money in Greece
Jim Mellon says that the Greeks should build a statue in my honour as on Friday I opened a bank account in Greece and made a deposit. Okay it was only 10 Euro, I need to put in another 3,990 Euro to get my residency papers so I can buy a car, a bike and a gun, but it was a start. But the scenes at the National Bank in Kalamata were of chaos, you could smell the panic and they were being replicated at banks across Greece.
For tomorrow is a Bank Holiday here and if you are going to default on your debts/ switch from Euros to New Drachmas a bank holiday weekend is the best time to do it. And with debt repayments that cannot be met due on June 5 (next Friday) Greece is clearly in the merde. If it defaults all its banks go bust.
But I had to open an account and make a deposit. Outside the bank in the main street of Kalamata there are two ATMs. The lines at both were ten deep when I arrived and when I left an hour later. Inside I was directed to the two desks marked “Deposit”. You go there to put in money, to open an account or if you are so senile that you cannot do basic admin of your account without assistance. As such it was me depositing cash and four octogenerians who had not got a clue about anything. Actually I lie. These folks may have been gaga but they were not so gaga that they were actually going to deposit cash, I was the sole depositer.
Friday was also the day when pensions are paid into bank accounts. On the Wednesday and Thursday it was reported that Greeks withdrew 800 million Euro from checking accounts. Friday’s number will dwarf that. Whe you go to a Greek bank you pull off a ticket and wait for your number to be called. The hall in my bank contains about 60 seats all of which were filled. There were folks standing behind the seats and in fact throughout the hall, all wanting to get their cash out before the bank closed at 2 PM.
At the side of the room, shielded by a glass screen sat a man behind a big desk. He tapped away at his screen and made phone calls. Ocassionally folks wandered over, shook papers in his face and harangued him having got no joy elsewhere. So I guess he was the bank manager. I rather expected him to end one phone call and stand up to say “That was Athens – all the money has gone, its game over folks.” But he didn’t. He may well do so at some stage soon.
Eventually I got the the front of my five person queue of the senile and opened my account. Passport, tax number, phone number all in order. I handed over a 10 Euro note and the polite – if somewhat stressed – young man gave me about ten pieces of paper to sign and stamped my passbook. I have done my bit for Greece and have given it 10 Euro which I will lose one way or another in due course. So Jim – time to lobby for that statue.
The Government did not put up a default notice on Friday as I half expected. The can kicking goes on. The ATMs will be emptied this weekend and on Tuesday and in the run up to a potential default day next Friday the banks will be packed again with folks taking out whatever money they can.
It is not just the bank coffers that are being emptied. To get to The Greek Hovel where I sit now from my local village of Kambos is a two mile drive. On my side of the valley there is some concrete track but it is mainly a mud road. On the other side of the valley there is a deserted monastery so to honour the Church – even if there are no actual monks there – a concrete road was built in the good times. By last summer it was more pothole than road.
By law, since I have water and electricity, I can demand that the road be mended and so last summer I went to the Kambos town hall (4 full time staff serving a population of 536) and did just that. They said “the steam roller is broken and we have no money but will try to do it in the Autumn.” They did not.
But last week a gang of men appeared and the road is now pothole free, indeed in some places we have a whole new concrete surface. And as I head towards Kalamta there are extensive road mending programmes. At Kitries, the village has found money to renovate its beach front. It is a hive of activity across the Mani.
Quite simply each little municipality is spending every cent it has as fast as it can. The Greek State asked all the town halls to hand over spare cash a few weeks ago to help with the debt repayment. The town halls know that next time it will not be a request but an order. But by then all the money they had hoarded will have been spent. That is Greekeconomics for you.
Everyone knows that something has to give and that it will probanly happen this summer. The signs are everywhere.
end
Then late this afternoon one last ditch effort to avoid a financial calamity:
(courtesy Bloomberg)
Merkel, Hollande and Juncker to Meet in Berlin in Attempt to Save Greece
European leaders and the head of the International Monetary Fund gathered in Berlin to discuss plans to present Greece with what’s likely to be its only realistic chance of avoiding default and staying in the euro.
The top-level huddle includes German Chancellor Angela Merkel, IMF chief Christine Lagarde and European Central Bank President Mario Draghi, according to three people familiar with the plan. They asked not to be named because the talks are private. Two of the people said the goal was to hammer out an offer that Greece could consider in coming days.
Attempts at breaking the deadlock over Greek funding have taken on fresh urgency as the nation faces a debt repayment to the IMF on Friday. While Greece has said it can make the payment, it’s the smallest of four due to the Washington-based fund totaling almost 1.6 billion euros ($1.78 billion) this month, just as its bailout package from the euro region expires.
With discussions in their fifth month, deadlines have come and gone with meetings, calls and summits yielding little as disagreements over pensions and labor laws persisted.
French President Francois Hollande and European Commission President Jean-Claude Juncker were also said to be attending the Berlin discussions. Spokespeople for the ECB and European Commission declined to comment on the negotiations, while the IMF confirmed Lagarde was meeting with Merkel.
Technical negotiations on economic measures Greece must take were resuming and an agreement is closer, though not ready, a Greek government spokesman said on Monday. The aim is to release about 7 billion euros from its existing bailout before the debate begins over a new package.
Common Ground
Merkel was expected to be more involved as time runs out between this week and a meeting of euro-region finance ministers on June 18 in Luxembourg. According to an international official at the weekend, creditor institutions were working on a common proposal that would be presented to Greece in coming days.
The joint position may be communicated to Greek Prime Minister Alexis Tsipras by European political leaders, the person said, asking not to be named, as he wasn’t authorized to speak publicly on the matter.
Tsipras held a call with Merkel and Hollande on Sunday, with a German government official calling it “constructive.” At the same time, Greece and its creditors traded accusations for a lack of progress on talks at the weekend, a hallmark of recent months.
Tsipras wrote in French newspaper Le Monde that any intransigence wasn’t the fault of his four-month-old administration. He referred to “absurd proposals” being presented to his government by institutions.
Not Acceptable
A senior German lawmaker said on Monday it was down to Greece to adhere to reforms agreed to before Tsipras took power. Michael Fuchs, deputy parliamentary leader of Merkel’s Christian Democrat party, said Greece is to blame for the crisis and it’s “fully not acceptable” for the government to accuse the European Union. He spoke to Bloomberg Television.
Financial markets in Athens will reopen after shutting on Monday for the Orthodox Pentecost holiday.
The yield on Greek 10-year bonds rose to 11.49 percent in London, up from 11.25 percent on Friday. Last week, the yield moved between 10.95 percent and 11.98 percent as local reports of progress were followed by warnings from European officials that a default can’t be ruled out.
JPMorgan Chase & Co., which in April 2014 helped Greece return to international debt markets, recommended investors sell some longer-dated Greek government bonds. The U.S. bank said there was an increasing risk of capital controls.
After recommending buying Greece’s longer-dated bonds about the time Tsipras was elected in January, JPMorgan said investors should take 10 basis points of profit on a long position in the 3 percent Greek bond maturing in February 2042. A JPMorgan spokesman in London said the strategists are independent of the bankers involved in capital markets, who declined to comment.
“Although the central scenario is for Greece to reach a compromise before missed payments and/or capital controls, our conviction is not high enough to justify aggressive risk-taking,” Gianluca Salford and Aditya Chordia, rates strategists at JPMorgan in London, wrote in a note to clients.
end
Greece blinks: it looks like they have relented on pension reforms.
However this must go to the Greek voters and that is when the fun begins!1
(courtesy zero hedge)
Greece Abandons “Red Lines” As Troika Meets In Berlin To Craft “Deal”
We’ve been saying for months that the troika’s ultimate goal in negotiations with Greek PM Alexis Tsipras is to use financial leverage to force Syriza into abandoning its campaign mandate, thus sending a strong message to the EU periphery’s other ascendant socialists that threatening to disprove the idea of ‘euro indissolubility’ is not a viable bargaining strategy when it comes to extracting austerity concessions from creditors.
Over the past several days the political situation has come to a head with Tsipras expressing his extreme displeasureat the troika’s “coordinated leaks” and unwillingness to give even an inch on what the PM calls “absurd” demands.
Meanwhile, Syriza has splintered with the far-left faction demanding a return to the drachma and a default to the IMF. We’ve contended that Tsipras will not be willing to go that route and risk an economic meltdown that would likely see him lose power altogether. The more likely scenario, we have argued, is that Tsipras caves to the troika, compromises on the government’s ‘red lines’ (pension reform being the most critical) and risks a government reshuffle on the way to a third program, thus averting a euro exit and keeping Greece from descending into a drachma death spiral, even as the “solution” effectively strips the Greek people of their right to choose how they want to be governed — a tragically absurd outcome in what is the birthplace of democracy.
Sure enough, it appears as though this is precisely what will unfold over the coming weeks as Tsipras has now indicated he is willing to compromise on pension reform. Reuters has more:
Greek Prime Minister Alexis Tsipras is ready to discuss pension reforms in negotiations with international creditors over a cash-for-reforms deal, German newspaper Die Welt reported on Monday.
Labour and pension reforms are believed to be among the big sticking points with Athens.
Die Welt cited participants in the negotiations as saying the prime minister had signaled he was ready to discuss pension cuts and a higher retirement age.
The Greeks has not yet submitted a concrete proposal, the paper added in a preview of an article to run in its Tuesday print edition.
And with that it will be missioned accomplished for the troika. The Greeks will remain debt serfs, Germany will have made its point and sent a strong message to the rest of the EU periphery, and the IMF… well, that’s still up in the air because Christine Lagarde has made it abundantly clear that the Fund does not wish to participate in perpetuating this ponzi any further unless Greece’s EU debtors agree to a writedown of their Greek bonds. Largarde and Draghi reportedly met with Merkel and Hollande in Berlin today, perhaps sensing that the charade is finally coming to an end.
Via Reuters again:
The chiefs of the European Central Bank and the International Monetary Funded headed to Berlin for talks late on Monday with the leaders of France and Germany on how to proceed with Greek debt negotiations.
EU officials said ECB chief Mario Draghi and Christine Lagarde of the IMF were joining the German and French leaders, and the president of the European Commission, with the aim of reaching a joint position on how to negotiate with Greece.
The unexpected development came after Greek Prime Minister Alexis Tsipras fired a broadside at international creditors that officials said bore little resemblance to his private talks with EU leaders.
For those interested to know what these “absurd” demands from the troika are, we bring you the following from KeepTalkingGreece who has the story:
Creditors command and demand, Greece is willing but … some red lines cannot be set aside. Apart from that, creditors’ commands are anything but logical as their demands could be only described as crazy. Furthermore the creditors seem divided as to what they demand from Greece with the logical consequence that the negotiations talks have ended into a deadlock.
According to Greek media reports,
While the European Commissions wants austerity measures worth 4-5 billion euro for the second half of 2015 and the 2016, the International Monetary Fund raises the lot to 7 billion euro for 2016. The all-inclusive austerity package should include among others €2.7 billion cuts in pensions.
The Pensions Chapter is one of the thorns among the negotiation partners, and Greece would love to postpone it for after the provisional agreement with the creditors, call them: Institutions.
While it is not clear whether it is the IMF or the EC or both, it comes down to the command that
“Pensions should not be higher of 53% of the salary due to the financial situation of the social security funds.”
Pension for a civil servant (director, 37 years of work) should come down to €900 from €1,386 today after the pension cuts during the austerity years.
Pension for private sector – IKA insurer (37 years of work, 11,000 IKA stamps) and salary €2,300 should come down to €1,250 from €1,452 today after the austerity cuts. (examples* via here)
Of course, with the PSI in March 2012, Greece’s social security funds suffered a huge slap in their deposits in Greek bonds.
According to the Bank of Greece report of 2012, social security funds were holding Greek bonds with nominal value €18.7 billion euro. The PSI gave them a new look with a nice hair cut of 53.5%. Guess, how many billions euros were left behind.
If one adds the loss of contributions due to high unemployment, part-time jobs, uninsured jobs and the disappearance of full time jobs in the last 3-4 years, the estimations concerning the money available at the Greek social insurance funds are … priceless!
Another thorn in the negotiations is the Value Added Tax rates.
Creditors reportedly want Value Added Tax hikes in the utility bills, electricity and water charged with 23% V.A.T. from 13% now.
Do I hear you say that the austerity recipe imposed to Greece is wrong? You’re totally right.
But creditors insist on it and then wonder why the soufflé dramatically sinks once it comes out of the oven in Brussels.
*examples: the pensions issue is a huge labyrinth as full or reduced (early retirement) pension calculation depends on several criteria in addition to the 37 years +11,000 IKA-stamps scheme. There is no average and therefore there can be no average cuts.
Before the crisis, pension was 80% of the salary of the last 5 work years. Now it has come down to 60% of either last salary after the salary & wages sharp cuts or of the best salary. And creditors want it down to 53%! Go figure…
What is fact is that pensions in private sector sank at 26% in the last 3 years.
Tensions rising between Russia and the West:
(courtesy zero hedge)
Russia Wards Off “Provocative And Aggresive” US Warship In Black Sea
While we are used to hearing of the 100s of “close encounters” between NATO and Russian planes,but, as reported by state news agency RIA – citing an anonymous source in Russia’s armed forces, Russian military aircraft were scrambled to head off a U.S. warship that was acting “aggressively” in the Black Sea.
We are used to plane-on-plane “close encounters”…
The source was quoted as saying that the U.S. destroyer Ross was moving along the edge of Russia’s territorial waters and heading in their direction.
“The crew of the ship acted provocatively and aggressively, which concerned the operators of monitoring stations and ships of the Black Sea Fleet,” RIA quoted the source as saying.
“Su-24 attack aircraft demonstrated to the American crew readiness to harshly prevent a violation of the frontier and to defend the interests of the country.”
“Apparently, the Americans have not forgotten the April 2014 incident when one Su-24 practically ‘blacked out’ all of the electronics on board the newest American destroyer Donald Cook,” the source said.
Russia’s Defence Ministry was not immediately available to comment on the report.
Saturday’s incident is the latest in a series of border surveillance confrontations between Russia and the West. Europeans, especially the Baltic states, have repeatedly sounded the alarm over Russian jets coming close to their borders.
The US is rotating several warships in and out of the Black Sea, where Russia’s naval bases are located. The USS Vella Gulf, USS Ross, USS Truxton, and the USS Taylor – as well as warships from other NATO member states – were spotted in the area over the past few months.
* * *
This appears to be the first reported ship-to-plane ‘encounter’ and,
just as US and China tensions are escalating in the South China Sea, it
appears US and Russian military ‘discussions’ are shifting from words
and proxy-fighting.
Europe Shocked When Russia Does To It What Europe Did To Russia
end
French unemployment surges by the most in 7 months as their economy seems to be faltering despite the weaker Euro:
(courtesy Bloomberg)
end
Your more important currency crosses early Monday morning:
Euro/USA 1.0926 down .0057
USA/JAPAN YEN 124.05 up .056
GBP/USA 1.5206 down .0066
USA/CAN 1.2481 up .0048
This morning in Europe, the Euro fell by a healthy 57 basis points, trading now just above the 1.09 level at 1.0926; Europe is still reacting to deflation, announcements of massive stimulation, a proxy middle east war, and the ramifications of a default at the Austrian Hypo bank, a possible default of Greece and the Ukraine, rising peripheral bond yields and today crumbling bourses.
In Japan Abe went all in with Abenomics with another round of QE purchasing 80 trillion yen from 70 trillion on Oct 31. The yen continues to trade in yoyo fashion as this morning it settled down again in Japan by 10 basis points and trading just above the 124 level to 124.05 yen to the dollar.
The pound was down this morning as it now trades well below the 1.53 level at 1.5206, still very worried about the health of Barclay’s Bank and the FX/precious metals criminal investigation/Dec 12 a new separate criminal investigation on gold, silver and oil manipulation.
The Canadian dollar is down by 48 basis points at 1.2440 to the dollar.
We are seeing that the 3 major global carry trades are being unwound. The BIGGY is the first one;
1. the total dollar global short is 9 trillion USA and as such we are now witnessing a sea of red blood on the streets as derivatives blow up with the massive rise in the rise in the dollar against all paper currencies
2, the Nikkei average vs gold carry trade (still ongoing)
3. Short Swiss franc/long assets (European housing/Nikkei etc. This has partly blown up (see Hypo bank failure). Swiss franc is now 1.0328 to the Euro, trading well above the floor 1.05. This will continue to create havoc with the Hypo bank failure.
These massive carry trades are terribly offside as they are being unwound. It is causing global deflation ( we are at debt saturation already) as the world reacts to lack of demand and a scarcity of debt collateral. Bourses around the globe are reacting in kind to these events as well as the potential for a GREXIT>
The NIKKEI: this morning : up 6.72 points or 0.03%
Trading from Europe and Asia:
1. Europe stocks mostly in the red
2/ Asian bourses mostly in the green … Chinese bourses: Hang Sang green (massive bubble forming) ,Shanghai in the green (massive bubble ready to burst), Australia in the red: /Nikkei (Japan) green/India’s Sensex in the green/
Gold very early morning trading: $1184.80
silver:$16.63
Early Monday morning USA 10 year bond yield: 2.13% !!! par in basis points from Friday night and it is trading under resistance at 2.27-2.32%.
USA dollar index early Monday morning: 97.33 up 42 cents from Friday’s close. (Resistance will be at a DXY of 100)
This ends the early morning numbers, Monday morning
And now for your closing numbers for Monday:
Closing Portuguese 10 year bond yield: 2.74 up 17 in basis points from Friday
Closing Japanese 10 year bond yield: .41% !!! up 2 in basis points from Friday/
Your closing Spanish 10 year government bond, Monday, up 13 points in yield
Spanish 10 year bond yield: 1.97% !!!!!!
Your Monday closing Italian 10 year bond yield: 1.98% up 13 in basis points from Friday: ( still massive central bank intervention/)
trading 1 basis point higher than Spain.
IMPORTANT CURRENCY CLOSES FOR TODAY
Closing currency crosses for Monday night/USA dollar index/USA 10 yr bond: 4 pm
Euro/USA: 1.0929 down .0053 ( Euro down 53 basis points)
USA/Japan: 124.84 up .839 ( yen down 84 basis points)
Great Britain/USA: 1.5200 down .0072 (Pound down 72 basis points)
USA/Canada: 1.2526 up .0095 (Can dollar down 95 basis points)
The euro fell today. It settled down 53 basis points against the dollar to 1.0929 as the dollar was up against all the various major currencies. The yen was down 84 basis points and closing well above the 124 cross at 124.84. The British pound lost some ground today, 72 basis points, closing at 1.5200. The Canadian dollar lost more ground back against the USA dollar,95 basis points closing at 1.2526.
As explained above, the short dollar carry trade is being unwound, the yen carry trade , the Nikkei/gold carry trade, and finally the long dollar/short Swiss franc carry trade are all being unwound and these reversals are causing massive derivative losses. And as such these massive derivative losses is the powder keg that will destroy the entire financial system. The losses on the oil front and huge losses on the USA dollar will no doubt produce many dead bodies.
Your closing 10 yr USA bond yield: 2.19% up 7 in basis point from Friday (below the resistance level of 2.27-2.32%)
Your closing USA dollar index:
97.42 up 51 cents on the day.
European and Dow Jones stock index closes:
England FTSE down 30.85 points or 0.44%
Paris CAC up 17.41 points or 0.35%
German Dax up 22.23 points or 0.19%
Spain’s Ibex up 20.50 points or 0.18%
Italian FTSE-MIB down 60.01 or 0.26%
The Dow up 29.69 or 0.16%
Nasdaq; up 12.90 or 0.25%
OIL: WTI 60.21 !!!!!!!
Brent:64.93!!!!
Closing USA/Russian rouble cross: 53.50 down 1 1/3 rouble per dollar on the day.
end
And now for your more important USA stories.
NY trading for today:
The Caitlyn Jenner Rally Clipped – Now You See It, Now You Don’t
Why did the market go up? The same reason Bruce Jenner is now a woman… why not? (oh and Media Coverage)
http://player.cnevids.com/embed/556468b661646d21a0000000/51cc9fb8bb8f55bdfb000005
The USDollar Index perhaps shows today’s market events best…
- 0700ET Early rumors of an imminent Greek deal sparked EUR buying, USD selling…
- 0845ET US PMI missed and dropped to Jan lows (USD weaker… pushes off rate hikes)
- 1000ET Construction Spending surges (USD spikes… rate hikes coming soon)
- 1417ET *DRAGHI, MERKEL AND HOLLANDE SAID TO DISCUSS GREECE TONIGHT (EUR up, USD down)
So – just remember, this is all priced in (as today’s market action showed)
Stocks limped higher overnight on China strength (and despite missed PMI expectations in Europe)… ramped vertically on Greece rumors, stalled on denials, then plunged on ‘good’ data… but ince Europe had closed it was off to the races until Carl Icahn spoke at around 1445ET – *ICAHN TELLS FBN HE HAS CONCERNS ABOUT STOCK MARKET, IT’S TIME FOR FED TO ‘STOP THE MEDICINE’
Futures show the volatility intraday…
The S&P 500 (cash) has oscillated up and down making lower highs since last week’s tumble…
A gentle reminder about ‘bubbles’…
Trannies were inspired…melting up to fill the Friday gap down open and flip-flopping once again with respect to oil price moves…
Treasury yields increased notably on both “good’ data and the pending issuance of a 100Y Petrobras bond (which would have demanded much of an illiqud market for rate locks) especially given chatter of a $10 bn order book!! *PETROBRAS $2.5B 100Y BONDS LAUNCH AT 8.45%
NOTE: Once the bond was issued, TSYs rallied and stocks dumped
As an aside – a zero-coupon 100 year bond issued at a yield of 8.45% implies a price of around 2.54c… so $2.5bn face means Petrobras actually raised $63.6 million cash (which will accrue to a $2.56bn cost in 100 years).
The Dollar was all about EUR once again today… (ahead of Wednesday’s ECB bollocks)
Across the commodity space there was plenty of volatility but by the close, everything was practically unch (despite USD strength)…
Gold and Silver were smashed higher in the pre-open, running stops over $1200 and $17 respectively, only to roundtrip perfectly as the dollar surged…
To summarize the day: “good” headline data sparks weakness in stocks but they are bid by the machines on the back ofg 10Y weakness driven by rate-lock buying due to the issuance of ‘idiot-maker’ bonds by the world’s largest insolvent energy company.
Charts: Bloomberg
Bonus Chart: What exactly do investors think will happen when this kind of volatility is added to the MSCI index next week? (Spoiler Alert – fixed risk budgets will mean reduced exposure NOT increased)
US Manufacturing PMI Weakest Since Jan, ISM Beats, Construction Spending Spikes Most In 3 Years
US Manufacturing PMI dropped to its lowest since January (54.0 May vs 54.10 April) but rose modestly from early month preliminary indications. So despite the harshness of the winter weather and the port strikes, US manufacturing is worse now than at any time since the peak of piss-poor-weatheriness. New orders rose at the weakest pace since Jan 2014 and input costs rose, and Markit suggests The Fed wait on rate hikes and despite Bill Dudley’s utterances, Markeit notes the “survey provides further evidence that the strong dollar is hurting the economy.” Against this weakness, ISM Manufacturing – in all its seasonally-adjusted glory, rose and beat by the most since Oct 2014 with new orders rising (umm?) and prices paid surging. And finally, construction spending – having not risen for 3 months – it recovered considerably, spiking 2.2% MoM – the most in 3 years.
US Manufacturing PMI weakest since January 2015…
Markit is imploring The Fed to stay easy… Commenting on the final PMI data, Chris Williamson, Chief Economist at Markit said:
“With manufacturers reporting the smallest rise in new orders since the start of last year, the survey provides further evidence that the strong dollar is hurting the economy. Falling exports and slumping profits were two weak links in the economy during the first quarter and look set to act as ongoing drags in the second quarter.
“While the economy still looks set to rebound from the decline seen in the first quarter, the extent of the second quarter recovery therefore remains highly uncertain and could well disappoint.
“It is encouraging to see employment growth holding up so well, with May seeing an increased rate of job creation in the manufacturing sector. But employment can often be a lagging indicator and payroll numbers will inevitably come under pressure if order book growth fails to improve in coming months.
“It therefore remains too early to take a reliable reading on the health of the economy and the data flow over the summer will be crucial in determining the timing of the first Fed rate hike.”
* * *
But on a global basis the PMIs appear to be mean-reverting – in their seasonally-adjusted magicness…
* * *
Back to the US and ISM Manufacturing ignored PMI and jumped, beating expectations by the most since Oct 2014
Respondents noted:
“Economy is showing signs of improvement.” (Food, Beverage & Tobacco Products)
“Automotive is still strong. However, steel prices have dropped due to overcapacity and the strong US dollar.” (Fabricated Metal Products)
“Overall business is steady. Employment in this area is up, a good sign.” (Transportation Equipment)
“Strong spring demand in agriculture.” (Chemical Products)
“The exchange rate on the dollar is hurting our sales in Asia. The conversion rate is lowering our profit in Europe where we sell in Euros.” (Computer & Electronic Products)
“Sales are starting to stabilize and show improvement from prior months, Year to Date (YTD). Concerns still exist with the overall economy.” (Apparel, Leather & Allied Products)
Continued challenges in markets related to oil and gas industries.” (Miscellaneous Manufacturing)
“Oversupply is continuing to tighten profit margins.” (Wood Products)
“West Coast port issues have eased up and our incoming imports are flowing again.” (Machinery)
“Chemicals pricing seems to have bottomed and is slowly rising again.” (Plastics & Rubber Products)
For some context… New orders dropped in reality but were seasonally adjusted to an increase!
And finally Construction spending.. spiked by the most in 3 years… which has not ended well previosuly…
* * *
Charts: Bloomberg
Cautious consumers cast doubt on U.S. growth outlook
U.S. consumer spending unexpectedly stalled in April as households cut back on purchases of automobiles and continued to boost savings, suggesting the economy was struggling to gain momentum early in the second quarter.
But there are signs a rebound from the first-quarter’s slump is under way, with other reports on Monday showing manufacturing activity picked up in May for the first time in seven months and construction spending surged in April to a near 6-1/2-year high.
Still, soft consumer spending and muted inflation pressures, after a price index for consumer spending in April recorded its smallest gain since late 2009 on an annual basis, suggest the Federal Reserve will probably not raise interest rates before the end of the year.
“The construction and manufacturing data cast a bit of sunshine on an otherwise cloudy day for economic data. We need to see more of a rebound in growth before the Fed pulls the trigger on interest rates,” said Diane Swonk, chief economist at Mesirow Financial in Chicago.
The Commerce Department said April’s flat reading in consumer spending followed a 0.5 percent increase in March.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, was also curbed by weak demand for utilities as temperatures warmed up. It had been forecast rising 0.2 percent.
In a separate report, the Institute for Supply Management said its national factory activity index rose to 52.8 last month from 51.5 in April.
The index had been declining since November as manufacturing battled a strong dollar and deep spending cuts in the energy sector in response to a plunge in crude oil prices. A reading above 50 indicates expansion in the manufacturing sector, which accounts for about 12 percent of the U.S. economy.
The index, which was also restrained by labor disruptions at the West Coast ports, was last month boosted by a surge in new orders and factory employment.
Fourteen out of 18 industries reported growth last month, including electrical equipment, appliances and components; primary metals, machinery and transportation equipment.
Another survey from financial data firm Markit showed factory activity improved toward the end of May.
“After transitory weakness in the first quarter, the manufacturing outlook has improved. But the dollar and lower oil prices continue to be a drag on some select industries,” said John Silvia, chief economist at Wells Fargo Securities in Charlotte, North Carolina.
The dollar firmed against a basket of currencies, while prices for U.S. government debt fell. U.S. stocks were modestly higher.
STURDY CONSTRUCTION
Gross domestic product contracted at a 0.7 percent annual rate in the first three months of the year.
But given that a confluence of temporary factors conspired to depress the output figure, including a problem with the model the government uses to smooth seasonal fluctuations, the decline in GDP likely overstates the economy’s weakness.
In a second report the Commerce Department said construction spending jumped 2.2 percent to an annual rate of $1.0 trillion, the highest level since November 2008. The percent increase was the largest since May 2012 and reflected broad gains in both private and public outlays.
Forecasting firm Macroeconomic Advisers raised its second-quarter GDP growth estimate by four-tenths of a percentage point to a 2.0 percent rate on the construction report.
Morgan Stanley lifted its estimate to a 2.1 percent rate from a 1.6 percent pace, while Goldman Sachs bumped up its estimate by one-tenth of a point to a 2.5 percent rate.
The manufacturing and construction reports added to business spending plans, employment and housing data in suggesting some momentum in the economy even as consumer spending and industrial production have been soft.
The weakness in consumer spending is puzzling given that wages are rising and households accumulated hefty savings from cheaper gasoline.
“Most likely, Americans are using their pump price savings to pay down debt, increase the money they put aside and for dining out,” said Chris Christopher, an economist at IHS Global Insight in Lexington, Massachusetts.
In April, personal income rose a solid 0.4 percent and the saving rate increased to 5.6 percent from 5.2 percent in March.
With consumption soft, inflation pushed further below the Fed’s 2 percent target.
The personal consumption expenditures (PCE) price index edged up 0.1 percent in the 12 months to April, the smallest gain since October 2009, after rising 0.3 percent in March.
Excluding food and energy, the core PCE price index increased 1.2 percent from a year ago after being up 1.3 percent in March.
The PCE price indices are the Fed’s preferred inflation measures. The soft readings are in sharp contrast with April’s consumer price index report published in May, which showed a pick-up in inflation over the last couple of months.
The differences reflect medical care prices, which are treated differently in both reports.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)
end
Let us close with this interview of Peter Schiff by Greg Hunter of USAWatchdog
(courtesy Peter Schiff/Greg Hunter/USAWatchdog)
Monetary Heroin Will Crash the Dollar-Peter Schiff
By Greg Hunter’s USAWatchdog.com (Earl Sunday Release)
Money manager Peter Schiff, who wrote a book three years ago called “The Real Crash,” thinks the next calamity is well on its way. Schiff says, “I think the next crash is going to be a dollar crash rather than a stock market crash. Certainly it is going to be an economic crash for the average American, and their cost of living goes skyrocketing.”
So, is the next crash going to be worse than the last meltdown? Schiff says, “It’s going to be much, much worse. If you understand what caused the 2008 financial crisis, it was the easy monetary policies of Alan Greenspan. . . . The monetary policies of Bernanke and Yellen dwarf what Alan Greenspan did. That was child’s play compared to what these guys have done. We have had zero percent interest rates for six years. We have had three rounds of quantitative easing (QE or money printing) and “Operation Twist.” The Fed has a $4.5 trillion balance sheet. This economy is so levered up, so addicted to a level of cheap money that has never before been experienced. So, the mistakes since the financial crisis are on an order of magnitude bigger than the ones that were made before it. The bust is always proportionate to the boom. This is a bigger boom, even though it doesn’t feel like it is because . . . if you take a lot of drugs, you build up a tolerance. We had a record dose of this monetary heroin, and we barely had a party. . . . Wall Street partied, but the middle class was left out.”
Schiff goes on to warn, “This is going to be the biggest hangover yet, the biggest bust yet. If you thought 2008 was bad, you ain’t seen nothing yet. That was the overture to a horrible opera that is about to unfold. The fat lady isn’t even in the theater yet. That is how early we are in this tragedy.”
On the Fed, Schiff says, “We have destroyed this economy. The Federal Reserve has prevented capital investment, entrepreneurship, economic growth that is real. Instead, we have diverted all these resources to sustaining asset bubbles to keep the stock market up, the real estate market up, to fund debt for education, housing and health care. We are strangling the real economy, and Main Street can feel it. Even though Wall Street is ignoring the pain on Main Street, you can see all these protests that have picked up.”
So, is another round of money printing, or QE, a lock? Schiff contends, “Oh yeah, the minute they did QE 3, QE 4 was a lock because whenever you do a round of quantitative easing, you cannot stop without doing it again. If you take drugs and you want to stay high, you need more drugs. Otherwise, you go through withdrawal. Whenever you get the economy high on QE, if you take away the QE, you take away the high. That’s why we are going back into recession. To pretend that you can have an economy on cheap money, and you take away the cheap money and the economy is going to endure, is nonsense. . . It was the Fed propping up this phony economy, and by propping up a phony economy, you prevent a real economy from ever emerging.”
Join Greg Hunter as he goes One-on-One with Peter Schiff, founder of Euro Pacific Capital andSchiff Gold.
(There is much more in the video interview.)
After the Interview:
There are articles and free reports on Schiff’s website Europac.com. If you would like to get a copy of “The Real Crash,”click here.
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Thanks Harvey, for all the effort to inform us. Hope you are fine and able to inform us also in the future. Hans
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